Will Cost Cuts Aid Union Pacific's (UNP) Earnings in Q2?
Union Pacific Corporation UNP is slated to release second-quarter 2020 results on Jul 23, before market open.
The railroad operator's earnings surpassed the Zacks Consensus Estimate in two of the last four quarters and lagged estimates on the remaining two occasions. The average beat is 4.2%.
Union Pacific Corporation Price and EPS Surprise
Moreover, the Zacks Consensus Estimate for second-quarter earnings has been revised 0.6% downward in the past 60 days. Against this backdrop, let’s take a look at the factors that might have shaped the company’s June-quarter performance.
Due to coronavirus-induced supply-chain disruptions and closure of the U.S. automotive plants, overall volumes are likely to have declined year over year in the to-be-reported quarter. In fact, the company’s chief financial officer Jennifer Hamann estimates volume decline to be close to 20% in the June quarter. Weakness in the Bulk, Premium and Industrial divisions is likely to have weighed on the overall volume picture. Segment wise, second-quarter carload volumes imply a 13.2% and 14.1% sequential decline for the Premium and Industrial divisions, respectively. The consensus mark for second-quarter overall carload volumes suggests a 15.2% fall from the figure reported in first-quarter 2020.
The top line is likely to have taken a hit from lackluster freight revenues (which account for bulk of the top line). The Zacks Consensus Estimate for freight revenues indicates a 16% decrease from the sequential quarter’s reported figure. The bottom line is likely to have been aided by this railroad operator’s cost-cutting measures. Increased efficiency from the precision scheduled railroading model is likely to have contained costs.
Despite the cost cuts, the operating ratio (operating expenses as a % of revenues) is unlikely to have improved in the June quarter, per Hamann. This is because of the bleak volume projection, which is likely to drag down revenues significantly. Notably, lower the value of the operating ratio the better. The Zacks Consensus Estimate for the operating ratio hints at a 5.1% deterioration to 62% from the sequential quarter’s reported number.
The proven Zacks model predicts an earnings beat for Union Pacific this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of beating estimates. However, that is not the case here as elaborated below. You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings ESP: Union Pacific has an Earnings ESP of +2.60% as the Most Accurate Estimate is pegged at $1.61, higher than the Zacks Consensus Estimate of $1.56. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Union Pacific carries a Zacks Rank #3, currently.
Highlights of Q1 Earnings
In the last reported quarter, Union Pacific’s earnings of $2.15 per share surpassed the Zacks Consensus Estimate of $1.86. Operating revenues of $5,229 million also beat the Zacks Consensus Estimate of $5,105.9 million.
Other Stocks to Consider
Investors interested in the broader Transportation sector may also check out some other stocks worth considering like United Airlines UAL, Southwest Airlines LUV and Air Lease Corporation AL as these too possess the two key ingredients to beat on the bottom line this reporting cycle.
United Airlines has an Earnings ESP of +20.59% and a Zacks Rank of 3, currently. The company will release second-quarter 2020 results on Jul 21.
Southwest Airlines presently has an Earnings ESP of +18.02% and is a #3 Ranked player. The company will release second-quarter 2020 results on Jul 23.
Air Lease has an Earnings ESP of +23.32% and is Zacks #3 Ranked at present. The company will release second-quarter 2020 results on Aug 6.
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