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On Feb 15, we maintained our Neutral recommendation on Union Pacific Corporation (UNP - Analyst Report), reflecting its diversified business base, favorable pricing gains and high customer satisfaction level. However, the sluggish economic growth, labor union issues and increased expenditures somewhat dampened the positive aspects of the company. The rail transportation service provider holds a Zacks Rank #3 (Hold).

Why Kept at Neutral?

On Jan 24, Union Pacific posted mixed fourth quarter 2012 financial results. The company’s earnings moved ahead the Zacks Consensus Estimate, while revenue missed our projection, hurt by lower coal and agricultural shipments.

Although weakness in the grain market is anticipated to weigh over agricultural revenue in the coming days, we believe that Union Pacific is progressing well on its operating and productivity improvements. The prime growth drivers of the company, in the coming quarters, will be broadly based on crude oil, chemicals, fracturing sand and automotive shipments along with recovery in housing starts. Perked up activities in the construction division will boost the performance of the Industrial unit, offsetting the effects of low steel mill utilization.

We appreciate the company’s commitment to make long-term investments of about 17-18% of the total revenue over the next several years. For 2013, the company expects to invest about $3.6 billion with more than half of the investments targeted toward infrastructure replacement and enhancement of commercial plants. The company aims to invest nearly $1 billion in service growth and productivity projects that will lend it an edge over other industry players such as Canadian National Railway Company (CNI - Analyst Report).

Nevertheless, we stay on the sidelines due to the concerns related to agricultural and coal volumes, stringent regulations, inflationary cost conditions and competitive threats. Additionally, the export business of the company is exposed to global uncertainties.

For the first and second quarters of 2013, the Zacks Consensus Estimates for earnings are $1.99 and $2.33 per share, respectively. This reflects a respective year-over-year growth of 10.95% and 10.85%.

Other Stocks

Other stocks operating within the sector that are worth considering are Genesee & Wyoming Inc. (GWR) – with a Zacks Rank #1 (Strong Buy) – and Canadian Pacific Railway Limited (CP) – with a Zacks Rank #2 (Buy).

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