All Aboard Union Pacific!

Union Pacific UNP reported earnings that beat Wall Street expectations, led by strong gains in agricultural, chemicals, and industrial products. The Omaha, Neb-based railroad operator reported earnings of $1.59 per share on $4.86 billion in revenues. Wall Street analysts expected earnings of $1.58 per share on $4.74 billion in revenues. The company saw strong revenue growth in all of its segments, with agricultural up 22 percent, chemicals up 19 percent, industrial Products up 16 percent, energy up 14 percent, automotive up 14 percent and intermodal up 13 percent. "Union Pacific achieved another strong quarter, delivering best-ever quarterly earnings," said Jim Young, Union Pacific chairman and chief executive officer. "We saw the benefits of our diverse franchise, with volume growth in five of our six commodity groups. We generated record second quarter operating income and cash from operations despite the impact of severe flooding in the Midwest." Young was especially positive on the second half of the second year, saying he expects volumes to pick up in the second half on strong harvest and the recovery in automotives. Young echoed the same thoughts that Michael Ward of CSX CSX had yesterday. "Looking to the second half of the year, we expect stronger performance despite some economic uncertainties and ongoing flood challenges," said Young. "With our diverse franchise and strong value proposition, we're well-positioned to leverage volume growth and achieve pricing gains that will improve financial returns for our shareholders." Shares are up 4% today on the back of the strong earnings beat and solid outlook for the rest of the year, and investors may want to consider looking at the railroad operator to diversify their portfolio and take advantage of continued strength in Union Pacific. The company continues to generate a strong return on equity, around 16%. Shares are trading at 13.5 times forward earnings and sport a 1.9% dividend yield. Over the past 52 weeks, shares returned 44%, compared to the 22% from the S&P 500. ACTION ITEMS:

Bullish:
Traders who believe that the railroads are going to continue showing strong earnings growth might want to consider the following trades:

• Go long the other railroads, such as Norfolk Southern NSC or Kansas City Southern KSU which have yet to report earnings.

• Buy railroad suppliers, like Genesee & Wyoming Inc. GWR, which will benefit as railroads increase capital expenditures.

Bearish:
Traders who believe that railroads are nearing the end of their bull run may consider alternate positions:

• Short all the railroads. Despite low valuations, if the economy falters again, the railroads are likely to suffer heavy, as shares of the group have run tremendously since the recovery started in 2009.

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