Analyst Jim Corridore of CFRA upgraded Union Pacific to hold from sell and raised his price target to $180 from $170 a share. The stock currently trades at $171, so the new price target represents 5% upside.
"Our upgrade reflects news of a trade truce with China," Corridore wrote in his note. "Intermodal volumes have been sharply lower in 2019, largely due to lower China-related imports and exports, and we expect this to impact Q2 results," he cautioned.
But the trade truce between the U.S. and China includes the agreement between Trump and Xi Jinping that both sides will refrain from additional tariffs. Plus, China will resume buying previously purchased volumes of agricultural products.
"We think increased trade could allow intermodal volumes to rise in the second half of the year," Corridore said. "This should help operating margins."
Union Pacific has been working to reduce its operating ratio (operating expenses as a percent of revenue). Higher revenue with no added costs would lift the company's margins, fueling management's agenda to return $20 billion by 2020 to shareholders through share buybacks.
Union Pacific shares rose 1.60% Monday.
What This Means
The Dow Transports, which Union Pacific is a member of, is often seen as an economic indicator. If transport companies like Union are transporting higher volumes of goods, demand for goods is strengthening. When there are lower transport volumes, demand is likely waning. Unsurprisingly, the Dow Jones Industrial Average rose 0.13% Monday, but market movements, including the slightly rising 10-year treasury yield, were relatively muted Monday. Some of those industrial producers paying fees to transporters like Union Pacific may be good stock picks for the second half of 2019.
It's important to note the U.S. economy has been largely decelerating. "The data has been weakening for the last several months," Marc Pfeffer, chief investment strategist at CLS Investments told TheStreet Monday. The inflation picture has been weaker [sub 2%]. "I don't think this [G-20 talks] necessarily changes anything." Of course, it takes the threat of more tariffs off the table, but doesn't wash away the existing ones.
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