BMO: Union Pacific On Track For Higher-Than-Expected Cost Savings

Meetings with senior management at Union Pacific Corporation’s UNP highlighted that, although there is increased downside risk to 2019 volume expectations, the company’s efficiency improvement initiatives are on the right track and remain in their early stages, according to BMO Capital Markets.

The Analyst

Fadi Chamoun maintained an Outperform rating on Union Pacific with an unchanged $190 price target of $190. The stock is BMO's top pick in the railroad sector.

The Thesis

Union Pacific has significant network capacity opportunities and will operate at low capital intensity as well as higher FCF and ROIC in the coming years, Chamoun said in the Wednesday note. (See his track record here.)

The company is making progress in enacting its Unified Plan 2020, the analyst said. Union Pacific could achieve cost savings of more than $2 billion in the medium term versus its initial target of $500 million for 2019, he said.

“We sense that despite the weaker-than-expected volumes and weather challenges, management remains confident in achieving the above-noted 2019 cost savings target."

While Union Pacific’s network is handling significantly lower carloads per week than the highest it achieved in the past 10 years, network efficiency is improving and freeing up incremental capacity, Chamoun said.

This could support higher FCF and ROIC, which the company expects to distribute to shareholders, the analyst said, adding that the ongoing network transformation “should help energize growth.”