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Union Pacific Missed Earnings -- What This Tells Us About Economy (Nothing Rosy)

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Union Pacific (UNP) - Get Union Pacific Corporation Report missed expectations Thursday. When we consider the main driver behind the revenue and earnings miss, the picture of the U.S. economy and market isn't exactly positive.

Union Pacific reported revenue of $5.5 billion, a 7% year-over-year decrease, missing Wall Street estimates of $5.67 billion. Earnings per share came in at $2.22, a 3.3% increase, missing analyst expectations of $2.31. Business freight volumes fell 8%.

The main driver of UNP's miss was the effects of the U.S.-China trade war, which is pressuring demand for goods in the U.S. "International volume was down 12% during the quarter, reflecting weak market conditions related to trade uncertainty, escalating tariffs," the company said on its earnings call.

What This Means for the Broader Market

Lower shipment demand means Union Pacific's customers are buying fewer items, likely because they're selling fewer items in the face of weaker demand.

The specific language the company used on the earnings call, referencing uncertainty, fits the macro picture of late. Sure, higher prices of goods as a result of tariffs will put incremental pressure on demand for the goods. But recently, the unpredictable nature of U.S.-China trade relations has made executives hesitant to invest, since their near-term costs are much less clear.

"If we look at a business where they're going to set up this new manufacturing plant, the idea that there are these tariffs that could come out of nowhere makes it really hard to plan," Michael Reynolds, investment strategy officer at Glenmede, recently told TheStreet.

Union Pacific's results are reinforcing the view that this phenomenon is becoming more prevalent. In both September and August the ISM manufacturing index contracted. Plus, data out Thursday showed industrial production fell 0.4%, worse than economists' expectation of -0.2%. This picture does not bode well for U.S. companies and their stock prices.

Since Oct. 2 the S&P 500 is up roughly 5%, as the market has grown slightly more optimistic a trade deal will get done. If it doesn't, there would be immediate risk to corporate earnings as well as longer-term risk, as the chances of a recession coming soon would rise.

Still, all three major U.S. indices were gently higher Thursday, as the U.K. announced a Brexit agreement with the EU. And industrial giant Honeywell (HON) - Get Honeywell International Inc. Report also reported strong earnings results.

For Union Pacific, Specifically

Even though Union Pacific's earnings results were weaker than expected Thursday, its shares rose as much as 1% and settled at a 0.5% gain to $164.06. There were several reasons for this.

Union Pacific's expense ratio, or operating expense divided by revenue, hit an all-time best 59.5%. The company's long-term goal is to keep that figure below 60%.

On another positive note, UNP's earnings per share are still growing, not only because of improved margins but also because of a share-buyback program some analysts call "aggressive." Union bought back $1.1 billion of stock in the quarter, causing the share count to fall 5% year-over-year.

Still, "negative volume trends keep us from being more bullish," CFRA analyst Jim Corridore wrote in a note Thursday. Corridore rates the stock a 'hold.' 

Honeywell is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells HON? Learn more now.

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