One of the largest railroad companies in North America, Union Pacific Corporation (UNP) is slated to release its second quarter 2011 results on Thursday, July 21, before the opening bell. The current Zacks Consensus Estimate for the second quarter is pegged at $1.58, representing an annualized growth of 12.72%.
With respect to earnings surprises over the trailing four quarters, Union Pacific has outperformed the Zacks Consensus Estimate in all the three quarters except the last quarter, where the reported EPS missed the Zacks Consensus Estimate by 2 cents. The average earnings surprise was a positive 5.90%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last three quarters.
First Quarter Recap
On April 21, 2011, Union Pacific reported its first quarter 2011 financial results. Quarterly net income was $639 million or $1.29 per share compared with a net income of $516 million or $1.01 per share in the year-ago quarter. However, EPS of $1.29 in the reported quarter missed the Zacks Consensus Estimate of $1.31.
Total operating revenue in the first quarter of 2011 was $4,490 million, up 13% year over year and surpassed the Zacks Consensus Estimate of $4,400 million. This solid performance was attributable to healthy operating ratio, higher business volume, cost efficiency and pricing gains, slightly offset by rising fuel prices and lower fuel surcharge recoveries.
Agreement of Estimate Revisions
In the last 30 days, out of the 27 analysts covering the stock, 1 analyst increased the EPS estimate for the second quarter of 2011 while 7 analysts decreased their estimates. Similarly, for the third quarter of 2011, out of the 26 analysts covering the stock, 2 analysts increased their EPS estimates while 2 decreased the same.
For fiscal 2011, over the last 30 days, out of the 29 analysts covering the stock, 3 analysts raised their EPS estimates while 5 analysts moved downward. Likewise, for fiscal 2012, out of the 28 analysts covering the stock, 5 analysts increased their EPS estimates while 1 analyst moved in the opposite direction.
Sequential increase in operating ratio and slower business volume growth are near-term concerns, which we believe have induced the analysts to lower their EPS estimates.
Magnitude of Estimate Revisions
During the last 30 days, the current estimate was a penny short of the Zacks Consensus Estimate of $1.58 for the ongoing quarter of 2011. For the second quarter of 2011, the current estimate was in line with the Zacks Consensus Estimate of $1.84. Similarly, for fiscal 2011 the current estimate inched down by a penny from the Zacks Consensus Estimate of $6.52 while for fiscal 2012, the current estimate was in line with the Zacks Consensus Estimate of $7.77.
Earnings Surprises
In the previous quarter, Union Pacific reported EPS of $1.29, which missed the Zacks Consensus Estimate by 2 cents. The ongoing quarter and the next quarter contain an earnings surprise of 0.63% and 1.09%, respectively (essentially a proxy for future earnings surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate upside potentials are 0.15% and 1.29%, respectively.
Our Recommendation
Strong fundamentals and improved pricing trends will act as positive catalysts for the stock going forward.
However, sluggish economic growth coupled with global economic recession and rising operating expenses will act as headwinds for the company in the long run. Moreover, increased competition from other transportation companies like CSX Corporation (CSX) and Norfolk Southern Corporation (NSC) will further put pressure on the company's stock.
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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