Union Pacific Banks on Strength in Sectors, Economic Growth - Analyst Blog

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On Aug 13, 2014 we issued an updated research report on Union Pacific Corporation ( UNP ). The company reported strong second-quarter 2014 results, beating the Zacks Consensus Estimate on both fronts. We are encouraged by the improvement in the U.S. economy, which in turn will offer growth opportunities across various sectors.

However, intensifying competition and rising expenses somewhat dampen our optimism regarding the company. Union Pacific currently carries a Zacks Rank #3 (Hold).

Union Pacific's diverse franchise and strong value proposition will offer growth opportunities across various sectors as the economy continues to expand. Apart from volume growth, core pricing above inflation will also lead to margin expansion and strong returns to shareholders. The company is progressing well with its operating and productivity improvement initiatives and has achieved a second-quarter 2014 operating ratio of 63.5%, which makes management confident of a sub 65% operating ratio before 2017.

Union Pacific expects to grow on increased grain shipments, continued demand for ethanol, imported beer delivery and recovery in housing starts going forward. Strength in construction products along with increased drilling of frac sand will also boost the industrial product business.

Meanwhile, intermodal volume is expected to grow owing to the ongoing highway conversion and new product offerings. Further, the automotive division is poised to gain from sale of finished vehicles and auto parts. Also, low inventory levels and higher natural gas prices will drive demand for coal, while strong projection of ethanol production will boost its volume.

Despite rising coal revenues, loss of a legacy contract is anticipated to weigh on the company's coal business in 2014, partially offsetting the positive impacts of other products lines. Additionally, the company foresees fewer legacy re-pricing opportunities this year. As a result, pricing gains are expected to be softer in 2014 when compared with 2013.

Management believes that the company has achieved its traditional peak in international demand this year and results could thus remain moderate during the remainder of 2014. Further, Union Pacific expects a 7-8% increase in depreciation expenses in 2014. Other expenses are expected to rise 5-10% in 2014, excluding unusual items.

Stocks that Warrant a Look

Other stocks that warrant a look in this sector include Trinity Industries Inc. ( TRN ) GATX Corp. ( GMT ) and Canadian Pacific Railway Ltd ( CP ). Trinity Industries sports a Zacks Rank #1 (Strong Buy), while GATX Corp. and Canadian Pacific Railway carry a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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