Union Pacific (UNP) Hurt by Weak Demand and High Debts

We recently issued an updated report on Union Pacific Corporation UNP. Factors like innovative cost-control initiatives and free cash flow generation are impressive. Meanwhile, sluggish volumes and declining shipments due to the coronavirus pandemic are hurdles.

The company's efforts to check on costs to drive the bottom line     are encouraging. In fact, operating ratio (operating expenses as a percentage of revenues) has been improving mainly owing to its cost-cut efforts. Operating ratio, which expanded 210 basis points (bps) year over year to 60.6% in 2019, is expected to improve further. We are also pleased by the efforts of Union Pacific to promote safety and enhance productivity.  The lacklustre freight scenario in the United States resulted in freight revenues declining 5% year over year in 2019 to $20.2 billion. Overall volumes (car loadings) declined 6% due to weakness in the agricultural products, premium and energy segments as well as due to the global pandemic. Moreover, the coronavirus pandemic is likely to have hurt first-quarter 2020 performance (detailed results should be out on Apr 23). In fact, results for the full year might also be adversely impacted due to the pandemic.

Union Pacific Corporation Price


Union Pacific Corporation Price

Union Pacific Corporation price | Union Pacific Corporation Quote


Union Pacific’s escalating debt levels are worrisome too. Debt/EBITDA ratio (adjusted) at Union Pacific stands at 2.5 at the end of 2019. A high Debt/EBITDA ratio often indicates that a firm may be unable to clear its debt appropriately. The company's investment toward enhancement of its facilities, resulting in higher capital expenditure ($3.2 billion in 2019), is likely to limit bottom-line growth.

Negative Estimate Revisions and Weak Momentum Score

The pessimism revolving around the stock is evident from the Zacks Consensus Estimate for current year earnings being revised downward by 17.4% in the past 60 days to $7.81.

The company’s Momentum Score of D further highlights its short-term unattractiveness.
Zacks Rank and Stocks to Consider

Currently, Union Pacific carry a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Transportation sector are GATX Corporation GATX, Spirit Airlines, Inc. SAVE and Höegh LNG Partners LP HMLP.  All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.

Long-term (three to five years) expected earnings per share growth rate for GATX, Spirit and Höegh LNG is pegged at 15%, 12.5% and 8.5%, respectively.

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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.

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