J.P Morgan: Cost Pressures Reduce Near-Term Upside On Union Pacific

Although Union Pacific's UNP 4Q10 results were in line with J.P Morgan's forecast, their cost side outlook was materially worse than expected. Management identified a list of items which drive meaningful cost side pressure in 2011 including rising other expense, depreciation, training costs and pension. J.P Morgan believes that UNP's medium term growth story has not changed significantly. However, it believes that the cost pressures are likely to make it more difficult for UNP to deliver upside EPS performance versus Consensus expectations in 2011. As a result, JPM suspects that patience will be required for UNP stock to regain momentum. J.P Morgan is maintaining its 2011 EPS estimate of $6.45/share but now believes that there is limited room for upside versus our forecast. It assumes 3.7% volume growth, 4% base price, and 30 bp of OR improvement in 2011 in order to arrive at the EPS estimate of $6.45/share. JPM believes that UNP's medium term story of strong pricing, meaningful margin expansion, and significant EPS growth, remains intact. However, it believes that the 2011 cost pressures reduce EPS momentum and potential for near term upside in the stock. JPM has a $102 PT and Overweight rating on UNP UNP is trading higher at $95.65