Loop Switches To Bullish Stance On Union Pacific, Cites Railroad's New Operating Plan

Union Pacific Corporation UNP stock rallied Tuesday after the company announced it will enact a new operating plan Oct. 1. One Wall Street analyst sees the move as reason enough to buy the stock.

The Analyst

Loop Capital Markets analyst Rick Paterson has upgraded Union Pacific from Hold to Buy and raised the price target from $153 to $188.

The Thesis

The shift to precision scheduled railroading principles is the right move for Union Pacific, Paterson said in the Tuesday upgrade note.

PSR is a method of increasing railroad efficiency by focusing more on moving cars than trains, increasing use of general-purpose trains and optimizing crews and rail asset utilization, the analyst said. 

It's been a while since Union Pacific was at the top of its game, but the PSR principles will better position the company and the stock in the long run, Paterson said. Loop is now projecting a 2020 Union Pacific operating ratio of 60 percent, up from a previous estimate of 58.9 percent. In the meantime, Union Pacific investors should be prepared for some short-term disruptions while the changes are made, he said. 

“UP will be the first Class I to attempt a conversion to PSR without the effort being led by the late Hunter Harrison, and it's going to be interesting to see if the team at UP is up to the task,” the analyst said. 

Not only is Paterson confident in Union Pacific’s plan, he said the shift to a PSR-centric model puts intense pressure on Norfolk Southern Corp. NSC to do the same. 

Price Action

After Tuesday morning’s gain, Union Pacific stock is now up 22.3 percent year-to-date.

Related Links:

Citi Bullish On Rail Stocks, Upgrades Norfolk Southern

Stifel Rides The Rails, Initiates Seven Stocks