Union Pacific Has Industry Headwinds To Blame For An Unexpected Q3 Miss

Rail pricing issues led Union Pacific Corporation UNP to report an unexpected third-quarter earnings miss. However, Morgan Stanley reiterated its Overweight rating on the stock as it believes the pricing is an issue impacting the entire rail sector and not cyclical.

The company reported third-quarter EPS of $1.36 versus Morgan Stanley's estimate of $1.45 and consensus estimates of $1.40. Revenues were $5.17 billion, down 1.6 percent versus Morgan Stanley's estimate of $5.25 billion but in line with the consensus’ $5.18 billion.

The company guided low single digit volume declines for the fourth quarter and 6–8 percent drop for the full year. Morgan Stanley sees volumes down 2 percent for the fourth quarter and 7 percent for the full year.

Related Link: Rail Earnings Season Scorecard

On the pricing front, the company cited weakness in energy and international coupled with competition for erosion in prices.

“However, we believe the pricing issue to be more pervasive across the business, given that the called out end markets only represent — 25 percent of revs. Furthermore, we do not believe that this is a one-off and do not believe that the price weakness is UNP specific,” analyst Ravi Shanker wrote in a note.

However, the analyst kept his bullish stance saying the company is in a better position versus Kansas City Southern KSU and Easterns to benefit from a potential coal and grain bounce in 2017.

“Longer term, UNP is in the "sweet spot" of OR improvement having more low-hanging fruit than the best-in-class Canadians but not the structural top-line issues of the Easterns,” Shanker added.

Meanwhile, Shanker cut his FY16/FY17 EPS estimates to $5.08/$5.90 from $5.17/$6.15. However, he reaffirmed his fourth quarter EPS view at $1.60.

At time of writing, shares of Union Pacific were up 0.41 percent to $91.01. The analyst cut his price target by $4 to $98.

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