Union Pacific Corporation
), one of the leading rail transportation companies, is slated to
release its third quarter 2012 results on Thursday, October 18. The
current Zacks Consensus Estimate for the third quarter earnings per
share is pegged at $2.19, representing a year-over-year increase of
Union Pacific Corp.'s second quarter earnings of $2.10 per share
surpassed the Zacks Consensus Estimate of $1.96 by 7.1% as well as
the year-ago earnings of $1.59 by 32%, driven by increased cargo
hauling despite weaker coal volumes.
Revenues increased 7% year over year to $5,221 million but fell
below our expectation. Volume growth from Automotive, Chemicals,
Industrial Products and Intermodal continued to aid revenue growth,
compensating for the lackluster performance by Coal and
Agricultural product lines.
Agreement of Estimate Revisions
Estimate revision for the third quarter and fiscal 2012 and 2013
remains downward skewed, projecting a negative market sentiment
towards the stock.
For the third quarter, out of 24 estimates, four moved downward
in the last 7 days while no upward revision was witnessed. Over the
last 30 days, there were one upward and sixteen downward estimate
For 2012, out of 26 estimates, one moved positive direction and
five moved the opposite in the last 7 days. In the last 30 days,
two estimates were positively revised, whereas seventeen were
The trend remains the same for fiscal 2013. In the last 7 days,
out of 26 estimates, one was a positive revision, while two were
negative. For the last 30 days five estimates made upward movement
against seven downward.
We believe this negative bias is primarily due to the declining
coal volumes of the company, which remains a key revenue
contributor. The company has already stated that coal volumes would
decline in the range of low to mid teens in the third quarter,
tempered by lower Southern Powder River Basin (SPRB) coal. The
company expects the loss of two legacy contracts last year and soft
demand in some utilities due to higher stockpiles to restrict
growth at SPRB.
In addition, agriculture volumes are also likely to weigh on
top-line growth. The U.S. agricultural market remains impacted by
drought conditions across the globe. Global food grain production
remained restricted by dry weather conditions in Eastern Europe,
lower grain production from major grain-exporting countries such as
Russia and Kazakhstan, and poor monsoon in India.
Further, International intermodal volume will also remain under
pressure due to weak container imports and contract losses. Wage
increases that came into effect on July 1, will likely take rail
inflation 2.5% higher in the second half of the year that would
weigh over the near-term operating margin.
Magnitude of Estimate Revisions
Over the last 7 and 30 days, the estimate for the third quarter
fell by a penny and 3 cents, respectively.
For 2012, the current estimate is $8.29, down 2 cents over the
last 7 days and 6 cents over the last 30 days.
However, for 2013, the estimate revision remained unchanged at
$9.52 over the last 7 and 30 days.
The company has delivered positive earnings surprises over the
trailing four quarters with an average beat of 7.11%.
Despite hovering coal headwinds, we are hopeful about the
company's continued strong performance based on encouraging market
trends for non-coal franchises. We believe that the company has an
attractive product franchise through its exposure to a unique mix
of commodity end markets alongside the strength in intermodal
We expect cyclical recovery in these markets coupled with
improved cost structure to support earnings growth in the future.
However, stringent regulations, rising expenditures and competitive
threats from its peers like
) may limit the upside potential of the stock.
Union Pacific retains a Zacks #3 Rank (short-term Hold rating).
We also reiterate our long-term Neutral recommendation on the
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