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Here's Why Investors Should Give Union Pacific (UNP) a Miss Now

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Union Pacific Corporation (UNP - Free Report) is currently mired in multiple headwinds, which made it an unimpressive investment option.

Let’s delve deeper

An Underperformer: The Union Pacific stock has declined 17.5% over the past six months compared with its industry’s 16.9% fall.


Zacks Investment Research
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Weak Zacks Rank and Style Score: Union Pacific currently carries a Zacks Rank #4 (Sell). Moreover, UNP’s current Momentum Style Score of D shows its short-term unattractiveness.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Southward Earnings Estimate Revisions: The Zacks Consensus Estimate for current-quarter earnings has been revised 1.69% downward over the past 60 days. For the current year, the consensus mark for earnings has moved 0.77% south in the same time frame. The unfavorable estimate revisions indicate brokers’ lack of confidence in the stock.

Bearish Industry Rank: The industry to which Union Pacific belongs, currently has a Zacks Industry Rank of 208 (of 250 plus groups). Such an unfavorable rank places UNP in the bottom 16% of the Zacks industries. Studies show that 50% of a stock price movement is directly related to the performance of the industry group it belongs to.

A mediocre stock within a strong group is likely to outclass a robust stock in a weak industry. Therefore, reckoning the industry’s performance becomes imperative.

Other Headwinds: Increase in fuel costs due to the uptick in oil prices is limiting bottom-line growth. In 2021, fuel expenses increased 56% year over year to $2,049 million at Union Pacific. In first-quarter 2022, fuel expenses escalated 74%. Higher fuel price hurt operating ratio (operating expenses as a % of revenues) to the tune of 80 basis points.

At the UBS Global Industrials & Transportation Conference in June, management stated that due to high operating expenses, Union Pacific is unlikely to meet its 2022 operating ratio (operating ratio as a % of total 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. At the conference, 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 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”. Tepid automotive freight revenues and a high debt load are other challenges facing UNP.

Stocks to Consider

Some better-ranked stocks within the broader Transportation sector that investors can consider are as follows:

Eagle Bulk Shipping (EGLE - Free Report) sports a Zacks Rank #1 presently. EGLE has a pleasant surprise history, with his earnings having outperformed the Zacks Consensus Estimate in two of the preceding four quarters while missing the mark in the other two.

Shares of Eagle Bulk have gained more than 4% in a year’s time. Improved market sentiments surrounding the Drybulk market are aiding the stock. EGLE owns one of the largest fleets of Supramax/Ultramax ships, globally. Efforts to upgrade its fleet also bode well.

Ryder System (R - Free Report) 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. R currently carries a Zacks Rank of 2.

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