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On Aug 30, 2013 we maintained our Neutral recommendation on rail transport service provider Union Pacific Corporation (UNP - Analyst Report). We remain encouraged by the company’s growth in chemicals and industrial segments. However, sluggish economic growth, fierce competition and labor union issues remain causes of concern. This Omaha-based company holds a Zacks Rank #3 (Hold).

Why Maintained?

The company is progressing well on its operating and productivity improvements. Ample opportunities to improve yields thanks to a higher rate of contract re-pricing as well as increased access to the West Coast intermodal business and energy related markets are encouraging.

Moreover, the company’s optimism surrounding growth across the majority of its product lines is complemented by steeper natural gas prices, strong crude oil market conditions and recovery in housing starts. These are likely to be its near-term growth drivers.

Additionally, strength in intermodal volume is expected to continue based on the ongoing truckload conversion and domestic expansion. We also anticipate near-term revenue growth in the automotive division as the demand to replace old vehicles is high.

Union Pacific boasts one of the industry's strongest balance sheets with solid free cash flow generating ability. This allows the company to provide high returns to shareholders via dividends and share buybacks.

However, Union Pacific’s performance is likely be hurt by sluggish domestic economic growth. Weakness in the agricultural market owing to less corn crop is anticipated to weigh on the company’s agricultural shipments in the future. Further, the company expects that the loss of a customer contract early this year will continue to hurt coal volumes. Based on these negatives the company has a clouded outlook for 2013.

Further, Union Pacific operates in a highly capital intensive industry that requires continued infrastructure improvement and acquisition of capital assets. Union Pacific plans to make long-term investments of about 17–18% of total revenue over the next several years, supporting operating efficiencies. These investments are likely to be accretive over the long term, but might weigh upon its margins in the near term.

Other Stocks

Other stocks that are worth considering within this sector are American Railcar Industries Inc. (ARII - Snapshot Report), Universal Truckload Services Inc. (UACL - Snapshot Report) and Con-Way Inc. (CNW - Snapshot Report). All these stocks currently hold Zacks Rank #2 (Buy).

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