Union Pacific Corporation
(
UNP
) the largest railroad provider in North America recently declared
its capital investment plan. The company plans to invest $3.6
billion for fiscal 2012. We believe that UNP is making such hefty
investments to support the strong growth opportunities and improve
its operating efficiencies.
As the U.S. economy recovers, the company remains committed to
invest around 17-18% of its total revenue in the coming several
years as a part of its long term investment plan. UNP plans to
invest in purchasing new locomotive and freight cars, building
intermodal terminals, double tracking the sunset corridor,
modernizing the safety equipment and various other projects in the
southern region. Apart from these, the company plans to invest an
additional $2 billion on the Positive Train Control (PTC) mandate -
a technology designed to track and control train movements to
improve safety - through 2015.
According to Association of American Railroads (AAR), given the
various ongoing infrastructures projects, the railroad companies
would continue to invest impressively. Seven of the class 1
railroads are expected to invest around $13 billion in 2012,
following investments of $10.7 billion and $12.0 billion in 2010
and 2011, respectively. Of the $13 billion expected to be invested
this year, UNP alone is likely to contribute around $3.6
billion.
North America's freight railroad carriers generally operate on
the infrastructure which they own and maintain. Hence, they are
focused towards expanding and upgrading their network so that they
can offer their services in an efficient and cost effective manner.
Despite the current concern regarding the shipment of utility coal,
the railroads continue to perform impressively based on the higher
demand of U.S. export coal particularly in Asia, along with rising
demand from the automotive sector. Additionally, the ongoing truck
to rail conversion also bodes well for the rail freight
carriers.
However, class1 railroads like
Norfolk Southern Corp.
(
NSC
)
CSX Corp
. (
CSX
)
Canadian National Railway Company
(
CNI
) face headwinds due to certain regulatory changes which include
the Positive Train Control (PTC) mandate, expansion of truck size
and weight and, others. Despite these negatives we believe that
these investments would help UNP improve its efficiencies.
Recommendation: Considering these factors, we maintain our
long-term Neutral recommendation on Union Pacific Corporation.
Currently, Union Pacific has a Zacks #3 Rank, implying a short-term
hold rating on the stock.
CDN NATL RY CO (CNI): Free Stock Analysis
Report
CSX CORP (CSX): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis
Report
UNION PAC CORP (UNP): Free Stock Analysis
Report
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