Dahlman Rose Comments On Union Pacific's Solid Earnings Beat

Union Pacific UNP reported 4Q10 EPS of $1.56, handily beating Dahlman Rose's and consensus estimates of $1.40 and $1.48, respectively. The company delivered a record fourth quarter OR of 70.2% making 2010 its most profitable year ever. However, 2011 cost concerns put pressure on the shares. For the third consecutive quarter, the company achieved a significant operations milestone. While the 4Q10 70.2% OR was higher than the sub-70% ORs in the two prior quarters, it was nonetheless an all-time best fourth quarter OR. That said, the operating leverage will likely continue to gradually decrease as the company has largely exhausted the option of bringing back furloughed employees. Despite some mild cost headwinds in 2011, Dahlman is maintaining its 2011 and 2012 EPS estimates of $6.35 and $7.35. The price target of $118, which is based on applying a 16x multiple to its new 2012 EPS estimate, remains unchanged. Dahlman believes Union Pacific remains well positioned to benefit further from the ongoing freight recovery and still has a good -albeit slowly diminishing- degree of operating leverage to be exercised in the next several quarters. Dahlman has a Buy rating and $118 PT on UNP UNP closed Thursday at $95.05