We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Union Pacific's (UNP) 2022 Margins to be Hit Hard by Cost Woes
Read MoreHide Full Article
At the UBS Global Industrials & Transportation Conference, Union Pacific (UNP - Free Report) stated that overall volumes for the June quarter were down 2% (data as of Jun 2, 2022) year over year. The downside was mainly due to the 6% decline in volumes for the premium segment. The sorry picture for the premium segment is mainly due to the 10% reduction in intermodal volumes.Weakness in the international markets (international intermodal volumes are down 22%) induced the decline in overall intermodal volumes.
Volumes at the bulk division slid 1% due to weakness in grain and grain products. Segmental volumes at the industrial segment were up 4% year over year owing to overall growth in the industrial market.
UNP also warned that higher fuel prices and other escalated costs will dent its operating margin for 2022 as inflation is at a four-decade high. Per UNP CFO Jennifer Hamann, “inflationary pressures beyond fuel have increased since the beginning of the year, and we now expect our all-in inflation to be around 4% for the full-year”. Due to the cost pressure, UNP now anticipates its current-year incremental operating margin to be below the original expectation of mid-60%.
Again, due to high operating expenses, Union Pacific is unlikely to meet its 2022 operating ratio (operating expenses as a % of revenues) guidance of beginning with 55. The ratio is likely to be higher. We note that lower the reading of this key metric, the better. However, growth is still expected for the current-year operating ratio from the prior-year reported figure. Despite the cost headwinds, overall volumes for 2022 are still expected to exceed the industrial production.
High costs apart, labor crunch and unfavorable weather are hurting UNP. Notably, shipping volumes are bouncing back from the pandemic pits but staff shortage is a bane as railroads like UNP try to meet the buoyant shipping demand scenario.
However, on a brighter note, UNP’s current-year guidance with respect to capital allocation remains unchanged. Management still anticipates share repurchases for 2022 to be in line with the 2021 levels. Additionally, UNP repeats a dividend payout view of approximately 45% (of earnings) in the ongoing year. Capital spending outlook of $3.3 billion is also intact.
Ryder has a trailing-four quarter surprise of 48.2%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters. R is benefiting from improving economic and freight conditions in the United States. Revenues in all segments grew (on higher rental revenues, new business and favorable pricing) in first-quarter 2022.
Recently, Ryder’s management lifted the earnings per share guidance for the second quarter as well as the full year. Favorable pricing in addition to strong rental and used vehicle sales promped management to hike guidance.
Continued recovery in air-travel demand bodes well for Southwest Airlines. Anticipating a steady improvement in bookings, the carrier expects to reap profits in the remaining three quarters of 2022 as well as during the full year. LUV's management predicts operating revenues to increase 12-15% in the second quarter of 2022 from the comparable period’s level in 2019. LUV is seeing strong bookings for the spring and summer trips.
The positivity surrounding the Southwest Airlines stock is evident from the Zacks Consensus Estimate for current-year earnings being revised in excess of 100% upward over the past 60 days. LUV has a Growth Style Score of B.
Unique Zacks Analysis of Your Chosen Ticker
Pick one free report - opportunity may be withdrawn at any time
Image: Bigstock
Union Pacific's (UNP) 2022 Margins to be Hit Hard by Cost Woes
At the UBS Global Industrials & Transportation Conference, Union Pacific (UNP - Free Report) stated that overall volumes for the June quarter were down 2% (data as of Jun 2, 2022) year over year. The downside was mainly due to the 6% decline in volumes for the premium segment. The sorry picture for the premium segment is mainly due to the 10% reduction in intermodal volumes.Weakness in the international markets (international intermodal volumes are down 22%) induced the decline in overall intermodal volumes.
Volumes at the bulk division slid 1% due to weakness in grain and grain products. Segmental volumes at the industrial segment were up 4% year over year owing to overall growth in the industrial market.
UNP also warned that higher fuel prices and other escalated costs will dent its operating margin for 2022 as inflation is at a four-decade high. Per UNP CFO Jennifer Hamann, “inflationary pressures beyond fuel have increased since the beginning of the year, and we now expect our all-in inflation to be around 4% for the full-year”. Due to the cost pressure, UNP now anticipates its current-year incremental operating margin to be below the original expectation of mid-60%.
Again, due to high operating expenses, Union Pacific is unlikely to meet its 2022 operating ratio (operating expenses as a % of revenues) guidance of beginning with 55. The ratio is likely to be higher. We note that lower the reading of this key metric, the better. However, growth is still expected for the current-year operating ratio from the prior-year reported figure. Despite the cost headwinds, overall volumes for 2022 are still expected to exceed the industrial production.
High costs apart, labor crunch and unfavorable weather are hurting UNP. Notably, shipping volumes are bouncing back from the pandemic pits but staff shortage is a bane as railroads like UNP try to meet the buoyant shipping demand scenario.
However, on a brighter note, UNP’s current-year guidance with respect to capital allocation remains unchanged. Management still anticipates share repurchases for 2022 to be in line with the 2021 levels. Additionally, UNP repeats a dividend payout view of approximately 45% (of earnings) in the ongoing year. Capital spending outlook of $3.3 billion is also intact.
Zacks Rank & Key Picks
Union Pacific currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Zacks Transportation sector are Ryder System (R - Free Report) and Southwest Airlines (LUV - Free Report) , presently flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ryder has a trailing-four quarter surprise of 48.2%, on average, with its earnings having surpassed the Zacks Consensus Estimate in all the last four quarters. R is benefiting from improving economic and freight conditions in the United States. Revenues in all segments grew (on higher rental revenues, new business and favorable pricing) in first-quarter 2022.
Recently, Ryder’s management lifted the earnings per share guidance for the second quarter as well as the full year. Favorable pricing in addition to strong rental and used vehicle sales promped management to hike guidance.
Continued recovery in air-travel demand bodes well for Southwest Airlines. Anticipating a steady improvement in bookings, the carrier expects to reap profits in the remaining three quarters of 2022 as well as during the full year. LUV's management predicts operating revenues to increase 12-15% in the second quarter of 2022 from the comparable period’s level in 2019. LUV is seeing strong bookings for the spring and summer trips.
The positivity surrounding the Southwest Airlines stock is evident from the Zacks Consensus Estimate for current-year earnings being revised in excess of 100% upward over the past 60 days. LUV has a Growth Style Score of B.