Earning Preview: Union Pacific - Analyst Blog

An improving U.S. economy, significant surge in automotive shipments, and a sharp rebound in many of the company's end markets are expected to fuel future growth of Union Pacific Corp. (UNP). In the previous quarter, the company benefited primarily from increased operating revenues due to growth in business volumes and pricing gains. Union Pacific will declare its fourth quarter 2010 financial results on January 20 before the market opens.

Agreement of Analysts

The recent Zacks Consensus Estimate revision trend is mostly favorable for Union Pacific. Out of the total 28 analysts covering the stock, 5 analysts raised their EPS estimates for the fourth quarter of 2010 during the last 30 days and just 2 analysts have gone reverse.

For fiscal 2010, 7 analysts raised their EPS estimates during the last 30 days and just 2 analysts reduced it. For fiscal 2011, 7 analysts raised their EPS estimates during the last 30 days and just 1 analyst reduced it.

If the current Zacks Consensus EPS of $1.47 for the fourth quarter materialized, it would be a substantial 35.78% year-over-year growth. Similarly, the current Zacks Consensus EPS Estimate of $5.44 for fiscal 2010 indicates a whopping gain of 50.82% year-over-year. For fiscal 2011, the current Zacks Consensus EPS Estimate of $6.46 also indicates a strong growth of 18.65 % year over year.

We believe the positive sentiments among analysts came mainly from strong pricing and volume. As the U.S. economy continues to grow gradually, demand for carriage also becomes robust and the momentum is expected to sustain in the near future. Analysts are also convinced that rail transportation companies will continue to push price increase toward their customers.

Magnitude of Estimate Revisions

In accordance with the overall positive estimate revision trend, the Zacks Consensus EPS Estimate for the fourth quarter of 2010 was up by 1 cent during the last 30 days although its remains static for fiscal 2010.  However, for fiscal 2011, the Zacks Consensus EPS Estimate increased by 3 cents during the last 30 days.

Earning Surprises

With respect to earnings surprises, Union Pacific's good track record is expected to persist in the coming quarters. Union Pacific produced a positive average earnings surprise of 7.47% in the last four quarters, beating the Zacks Consensus Estimate by that measure over the last year.

The current Zacks Consensus Estimates for both the fourth quarter and fiscal 2010 contain upside potential (essentially a proxy for future earning surprises) of 0.68% and 0.18%, respectively. There also exists 2.63% upside potential for the current Zacks Consensus EPS estimate for fiscal 2011.

Our Recommendation

We maintain our long-term Neutral recommendation on Union Pacific. Currently, it holds a short-term Zacks #3 Rank (Hold). Despite all these positives, we currently remain Neutral on Union Pacific only due to its valuation, which moved up by more than 63% in the last one year and provides limited above market opportunity in the near term.