On Dec 20, we issued an updated research report on the Omaha, NE- based railroad operator Union Pacific Corporation (UNP - Free Report) .
Shares of Union Pacific have outperformed the Zacks categorized Transportation-Rail industry on a year-to-date basis. The stock has gained 34.51% compared with the industry, which advanced 28.04% in the same period.
The outperformance has been driven by a number of positive factors. The company’s efforts to reward investors through share buybacks and dividend payments is highly encouraging. The company has an impressive history of making dividend payments for 117 consecutive years. This November, the company raised its quarterly dividend payout by 10%. Further, the company's board announced a new share buyback plan that allows it to repurchase up to 120 million common shares by the end of 2020. The company has returned $3.6 billion to its stockholders in the first nine months of 2016 through these investor-friendly measures. Of the $3.6 billion, approximately $2.2 billion have been returned through share buybacks.
We are also encouraged by the company's prudent cost management. The company, which achieved an operating ratio of 62.1% in the third quarter, is on track to achieve its guidance of around 60% by 2019. The company eyes an operating ratio of around 55% for the longer term.
The performance of the agricultural products segment in the third quarter is a positive. The strength of the grain market is also encouraging. The robust U.S. harvest and the strong global demand for U.S. grain are expected to boost exports. The company's bottom line is projected to grow at an attractive 8.4% over the next three to five years.
However, declining coal shipments are the biggest concerns for this Zacks Rank #3 (Hold) company. Union Pacific, reported lower-than-expected earnings in the third quarter, primarily due to coal-related headwinds. Moreover, on a year-over-year basis, earnings plummeted 9% while revenues declined 7%. In the third quarter, coal revenues (freight) decreased 19% year over year to $728 million. Volumes declined 14% and average revenue per car fell 6% year over year.
Furthermore, decreasing volumes of industrial products, automotive, chemicals and intermodal also hurt third-quarter results. Volumes are expected to decline in low-single digits and in the range of 6–8% in fourth quarter and full-year 2016, respectively. Coal volumes are expected to be down in low teens in the fourth quarter.
Declining coal shipments are hurting not only Union Pacific but other railroad operators like Kansas City Southern (KSU - Free Report) , CSX Corp. (CSX - Free Report) and Norfolk Southern Corp. (NSC - Free Report) as well.
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>