Union Pacific’s Strong Q4 Will Aid Its Stock Price Growth

[Updated: Jan 27, 2022] Union Pacific Q4 Earnings Update

Union Pacific (NYSE: UNP) reported its Q4 results last week, with revenue above, but earnings falling short of our estimates. The company reported revenue of $5.7 billion (up 12% y-o-y), in-line with our forecast and slightly above the consensus estimate of $5.6 billion. Union Pacific’s EPS of $2.66 was up 30% y-o-y, and it was lower than our forecast of $2.71. However, the company was able to beat the consensus estimate of $2.61. All three key segments – Bulk, Industrial, and Premium saw revenue growth. Our dashboard on Union Pacific’s Revenues offers more details on the company’s segments.

After an earnings beat (compared to the consensus estimates), UNP stock has seen a rise of 2% last week, outperforming the broader markets, with the S&P500 falling 5%. Union Pacific reported a 360 bps decline in operating ratio despite rising fuel prices. This marked a better performance compared to its peer CSX, which saw its operating ratio of 60.1%, up 301 bps from 57.0% in the prior year quarter. Union Pacific, in-line with other major railroad companies, has been focused on reducing its operating ratio. Despite the challenges during the pandemic, and inflationary headwinds in 2021, Union Pacific reported a low figure of 57.2% in 2021, compared to 59.9% in 2020, and 60.6% in 2019. Furthermore, the company has stated that it expects its operating ratio to decline further to 55.5% in 2022.

We have also updated our model following the company’s recently announced Q4 results. We have revised our Union Pacific’s Valuation  to be around $267 per share (vs. $262 earlier) which is 9% above the current market price of $244. This represents a P/E multiple of 23x for the company based on our EPS forecast of $11.46 for Union Pacific in 2022.

While UNP stock looks poised for some more gains going forward, it is helpful to see how its peers stack up. Check out how Union Pacific’s Peers fare on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[Updated: Jan 18, 2022] Union Pacific Q4 Earnings Preview

Union Pacific (NYSE:UNP) is scheduled to report its Q4 2021 results on Thursday, January 20. We expect the company to post revenue and earnings above the consensus estimates. The company likely navigated well over the latest quarter, driven by an expected increase in coal transportation as well as a rebound in industrial freight, in our view.

However, the margins in Q4 may face some pressure due to inflationary headwinds as the company renews its contracts. While we estimate the revenue and earnings to be above the consensus estimates, our forecast indicates that Union Pacific’s valuation is around $262 per share, which offers only 6% upside potential, implying that UNP stock is appropriately valued at its current levels. Our interactive dashboard analysis on Union Pacific’s Pre-Earnings has additional details.

(1) Revenues expected to be above the consensus estimates

Trefis estimates Union Pacific’s Q4 2021 revenues to be around $5.7 billion, slightly above the $5.6 billion consensus estimate. The rise in the vaccination rate in the U.S. has resulted in a pickup in economic activities, and this should bode well for Union Pacific’s freight business. The company’s 13% revenue growth in Q3 was driven by a 14% rise in bulk revenues, a 22% jump in industrial, and 1% growth for its premium freight. Automotive freight was down 13% due to the impact of chip shortages on the overall production, and, in turn, its transportation.

The company’s largest segment – industrial freight – likely saw strong sales in Q4 given the economic growth. However, a drop in natural gas prices in Q4 due to rising output and the spread of Omicron may impact the overall sales growth in Q4 and Q1. Our dashboard on Union Pacific’s Revenues offers more details on the company’s segments.

2) EPS also likely to be below the consensus estimates

Union Pacific’s Q4 2021 earnings per share (EPS) is expected to be $2.71 per Trefis analysis, 10 cents above the consensus estimate of $2.61. Union Pacific’s net income of $1.7 billion in Q3 2021 reflected a 23% rise from its $1.4 billion figure in the prior-year quarter. This can be attributed to higher revenues, and a 240 bps fall in operating ratio to 56.3%. Looking forward, inflationary pressure and rising wages likely impacted the company’s margins in Q4, weighing on overall earnings growth. The impact may be minimal if the company successfully passes on the increased costs to the customers during the contract renewals in Q4 and Q1. For the full-year 2022, we expect the EPS to be higher at $11.35, compared to $7.88 in 2020, and an estimated $10.00 in 2021.

(3) Stock price estimate 6% above the current market price

We estimate Union Pacific’s Valuation to be around $262 per share which is 6% above the current market price. This represents a P/EBITDA multiple of 19.1 for the company based on our forecast for Union Pacific EBITDA for the current fiscal year. Overall, UNP stock appears to be appropriately priced at its current levels and investors may be better off waiting for a dip to buy the stock for higher gains, in our view.

While UNP stock appears to be appropriately priced, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Heartland Express vs. Altice USA.

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