Union Pacific Corporation(UNP) is slated to release its first quarter 2011 results on Monday, April 20, before the opening bell. The current Zacks Consensus Estimate for the fourth quarter is pegged at $ 1.31, representing an annualized growth of 29.67%.
With respect to earnings surprises, over the trailing four quarters, Union Pacific has outperformed the Zacks Consensus Estimate for all the four quarters. The average earnings surprise was a positive 7.86%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Third-Quarter Performance
On January 20, 2011, Union Pacific reported its fourth quarter 2010 financial results. Quarterly net income reached a record high of $ 775 million or $ 1.56 per share compared with a net income of $ 549 million or $ 1.08 per share in the year-ago quarter. Fourth quarter 2010 earnings per share (EPS) of $ 1.56 surpassed the Zacks Consensus Estimate of $ 1.48.
Fourth quarter 2010 total revenue was $ 4,410 million, up 17% year over year. This was also better than the Zacks Consensus Estimate of $ 4,343 million. The growth in revenue was attributable to massive growth in business volume, cost efficiency and pricing gains.
Agreement of Estimate Revisions
In the last 30 days, out of the 27 analysts covering the stock, 2 analysts increased their EPS estimates for the first quarter of 2011 while 9 analysts reduced their estimates. Similarly, for the second quarter of fiscal 2011, out of the 26 analysts covering the stock, 3 analysts increased their EPS estimate upward but 2 decreased it downward.
For fiscal 2011, in the last 30 days, out of the 30 analysts covering the stock, 4 analysts increased their EPS estimates while 6 analysts decreased their estimates. Likewise, for fiscal 2012, out of the 30 analysts covering the stock, 2 analysts increased their EPS estimates while 2 slashed their EPS estimates. We believe that the decrease in estimates was mainly due to sequential increase in operating ratio, which might persist in the upcoming quarters.
Magnitude of Estimate Revisions
During the last 30 days, the Zacks Consensus Estimate was 2 cents above the current estimates of $ 1.31 for the first quarter of 2011 but was in line with the second quarter EPS estimate of $ 1.62. For fiscal 2011, the Zacks Consensus Estimate inched down by a penny from $ 6.53 to $ 6.52. While for fiscal 2012, the Zacks Consensus Estimate inched up by a penny from $ 7.62 to $ 7.63.
Earning Surprises
In the previous quarter, Union Pacific reported EPS of $ 1.56, which was 8 cents above the Zacks Consensus Estimate. The current Zacks Consensus Estimates for the ongoing quarter contains a 0.76% downside potential while for the upcoming quarter, it is reflecting a 1.23% upside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate upside potential is 0.77% and 0.26%, respectively.
Our Recmmendation
An improving U.S. economy, significant surge in automotive and intermodal shipments, coupled with a sharp rebound in many of the company’s end markets are expected to fuel future growth for Union Pacific. However, sequential increase in operating ratio and slowing business volume growth remain two near-term concerns. Moreover, competition from other freight railroad operators in the U.S. such as KansasCity Southern(KSU), CSX Corp. (CSX) and Norfolk Southern Corp. (NSC) will hurt profitability going forward.
We, thus, maintain our long-term Neutral recommendation for Union Pacific Corporation. Currently, Union Pacific Corporation has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
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