Analysts Split on Union Pacific After Fourth-Quarter Earnings Miss

Wall Street is mixed on Union Pacific following an earnings miss for the railroad company.
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Shares of Union Pacific (UNP) - Get Report were off 1.2% to $184.90 Friday as analysts reacted to the railroad company's latest earnings, which missed Wall Street forecasts.

The Omaha, Nebraska-based company reported fourth-quarter earnings of $1.4 billion, or $2.02 a share, down from $2.12 a share a year ago. Analysts were looking for earnings of $2.07 a share. Revenue was $5.21 billion, down 9.5% from a year ago, and short of Wall Street's call for $5.22 billion.

“Given the challenging volume environment, we leveraged strong productivity to deliver solid financial results including the third consecutive quarter with an operating ratio below 60 percent,” Lance Fritz, chairman, president and CEO, said in a statement.

Union Pacific said that it plans to reduce its average number of workers by around 8% in 2020 after cutting its staffing by 11% in 2019. The company had about 37,500 workers during 2019 and almost 42,000 during 2018.

For 2019, Union Pacific reported net income of $5.9 billion, or $8.38 a share,  a 1% decrease and 6% increase, respectively, from 2018.

UBS analyst Thomas Wadewitz downgraded the stock to neutral from buy, but raised his price target to $201, up from $184.

While Wadewitz said the company has realized "impressive" cost savings in 2019, he believes that further cost gains are already reflected in his earnings projections.

Wadewitz also cautioned that generating large volume growth will be "difficult" this year because of the headwinds in coal and frac sand. He added that the new price target is not enough to warrant a buy rating.

Mark Levin, an analyst with Benchmark, initiated coverage of Union Pacific with a buy rating and $206 price target.

Levin said that his target multiple "looks aggressive," but he thinks the company can generate earnings of $12.10 a share. If Union Pacific reaches its long-term 55% operating ratio target he thinks its EPS power is an even greater $12.45.

BMO Capital analyst Fadi Chamoun increased his price target to $200 and kept his outperform rating, saying that the company's fourth-quarter results underscore its operating improvement.

Chamoun noted that the operating ratio decline of 190 basis points in spite of the 14% revenue-ton-mile decline in the quarter and anticipates a boost in free cash flows as revenues stabilize and costs are reduced further in 2020.

John Eade, an analyst with Argus, raised his price target to $205 and kept his buy rating, noting that the fourth-quarter results showed an operating ratio decline in spite of the lower revenue.

Eade said the Union Pacific's volume trends look challenging, but the company is still growing earnings and focusing on cost cuts and share buybacks. He also noted the confidence of the company's management reflected in its 5 dividend hikes over the past 9 quarters.