On Tuesday, BofA Securities adjusted its outlook on Union Pacific (NYSE:UNP), reducing the price target to $270 from $273, while still recommending the stock as a Buy. The adjustment follows Union Pacific's third-quarter performance, where carload growth was reported at 5.1%, slightly above the forecasted 4.7%.
International Intermodal volumes have seen a significant increase of 27% year-over-year for the quarter to date, surpassing the growth in Domestic Intermodal, which reported a moderate single-digit rise. This has contributed to a 14% overall increase in Intermodal carloads compared to the same period last year.
Despite this growth, the revenue per carload is anticipated to decrease due to lower yields from International Intermodal, which are about 30-40% below the average.
At Union Pacific's recent analyst day, CFO Jen Hamann highlighted the disparity in yields between International and Domestic Intermodal. With International yields around $1,200 per carload and Domestic at approximately $1,600, the mix is expected to result in a near 6% year-over-year decline in Intermodal revenue per car, falling to an estimated $1,375.
The anticipated lower margin contribution from International Intermodal has led to a slight revision in earnings per share (EPS) estimates for the upcoming years. BofA Securities has lowered its EPS projections for Union Pacific by 2% for the third quarter of 2024 to $2.75, and by 1% for both 2024 and 2025, to $11.05 and $12.25 respectively, from the previous estimates of $2.80, $11.15, and $12.40.
In other recent news, Union Pacific held its first investor day since 2021, outlining its financial goals and emphasizing its commitment to safety, service, and operational excellence. The company aims for a 3-year earnings per share (EPS) compound annual growth rate (CAGR) between high-single-digit to low-double-digits.
This growth is expected to be driven by revenues, excluding fuel surcharges, growing at a faster pace than volumes, excluding coal. Union Pacific anticipates that its volumes will surpass market growth over the next three years.
BofA Securities and BMO Capital have adjusted their price targets for Union Pacific shares, while maintaining a Buy and Outperform rating respectively. TD Cowen and Stifel also maintained a Buy rating, reflecting confidence in the company's growth strategies.
However, Jefferies reiterated a Hold rating on Union Pacific shares, suggesting that despite Union Pacific's strong management team and financials, further improvements are likely to be incremental.
Union Pacific is currently facing allegations of obstructing a federal safety audit and has expressed concerns over the potential effects of a lockout of approximately 10,000 Canadian unionized workers by Canadian National Railway (TSX:CNR) and Canadian Pacific (NYSE:CP) Kansas City on both the U.S. and Canadian economies. These are recent developments that could impact Union Pacific's operations and reputation.
InvestingPro Insights
Union Pacific (NYSE:UNP) continues to demonstrate financial resilience and strategic prowess in the face of industry challenges. With a market capitalization of $148.64 billion and a P/E ratio of 22.9, reflecting investor confidence, the company stands out with impressive gross profit margins of 54.68% over the last twelve months as of Q1 2023. This margin strength is indicative of the company's efficient operations and pricing power within the Ground Transportation industry, aligning with the growth in intermodal carloads highlighted in the BofA Securities report.
An InvestingPro Tip that is particularly relevant in the context of the article is Union Pacific's history of dividend growth, having raised its dividend for 17 consecutive years and maintained payments for 54 consecutive years. This consistency is a testament to the company's commitment to shareholder returns and financial stability. Additionally, the company's moderate level of debt contributes to its robust financial position, allowing it to navigate the competitive landscape effectively.
For investors seeking more in-depth analysis, there are additional InvestingPro Tips available on the platform, including insights on Union Pacific's stock price volatility, revenue valuation, and profitability forecasts. Interested readers can access these valuable tips by visiting https://www.investing.com/pro/UNP for a comprehensive investment perspective.
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