On Aug 30, 2013 we maintained our Neutral recommendation on
rail transport service provider
Union Pacific Corporation
). We remain encouraged by the company's growth in chemicals and
industrial segments. However, sluggish economic growth, fierce
competition and labor union issues remain causes of concern. This
Omaha-based company holds a Zacks Rank #3 (Hold).
The company is progressing well on its operating and
productivity improvements. Ample opportunities to improve yields
thanks to a higher rate of contract re-pricing as well as
increased access to the West Coast intermodal business and energy
related markets are encouraging.
Moreover, the company's optimism surrounding growth across the
majority of its product lines is complemented by steeper natural
gas prices, strong crude oil market conditions and recovery in
housing starts. These are likely to be its near-term growth
Additionally, strength in intermodal volume is expected to
continue based on the ongoing truckload conversion and domestic
expansion. We also anticipate near-term revenue growth in the
automotive division as the demand to replace old vehicles is
Union Pacific boasts one of the industry's strongest balance
sheets with solid free cash flow generating ability. This allows
the company to provide high returns to shareholders via dividends
and share buybacks.
However, Union Pacific's performance is likely be hurt by
sluggish domestic economic growth. Weakness in the agricultural
market owing to less corn crop is anticipated to weigh on the
company's agricultural shipments in the future. Further, the
company expects that the loss of a customer contract early this
year will continue to hurt coal volumes. Based on these negatives
the company has a clouded outlook for 2013.
Further, Union Pacific operates in a highly capital intensive
industry that requires continued infrastructure improvement and
acquisition of capital assets. Union Pacific plans to make
long-term investments of about 17-18% of total revenue over the
next several years, supporting operating efficiencies. These
investments are likely to be accretive over the long term, but
might weigh upon its margins in the near term.
Other stocks that are worth considering within this sector are
American Railcar Industries Inc.
Universal Truckload Services Inc.
). All these stocks currently hold Zacks Rank #2 (Buy).
AMER RAILCAR (ARII): Free Stock Analysis
CON-WAY INC (CNW): Free Stock Analysis Report
UNIVL TRUCKLOAD (UACL): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
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