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Union Pacific (UNP) Q2 Earnings: Another Beat in Store?

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Leading railroad operator, Union Pacific Corporation (UNP - Free Report) , is slated to release second-quarter 2017 results on Jul 20, before the market opens.

In the first quarter, the company’s earnings of $1.32 topped the Zacks Consensus Estimate of $1.23. Also, the bottom line expanded 13.8% on a year-over-year basis, aided by lower costs. Consequently, the improvement in the coal-related scenario boosted results. While coal revenues (freight) improved 25% year over year to $648 million, volumes increased 16%.

We expect this bright scenario to aid results in the second quarter as well. The positive sentiment surrounding the stock can be gauged from the fact that the Zacks Consensus Estimate for the quarter has moved up 2.23% in the last 30 days.

Why a Likely Positive Surprise?

Our proven model shows that Union Pacific is likely to beat the Zacks Consensus Estimate this quarter because it has the perfect combination of two key ingredients.

Zacks ESP: Union Pacific has an Earnings ESP of +1.46% as the Most Accurate estimate is at $1.39, while the Zacks Consensus Estimate is pegged at $1.37. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Union Pacific holds a Zacks Rank #2 (Buy). Notably, stocks with Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank stocks here.

However, the combination of Union Pacific’s Zacks Rank #2 and +1.46% ESP makes us reasonably confident of an earnings beat.

Factors at Play

We expect coal volumes to increase and aid results in the to-be-reported quarter. In fact, at the Bank of America 2017 Transportation Conference in May, the company's CFO, Rob Knight, painted a rosy picture for the quarter.

Evidently, coal volumes increased 21% year over year as of May 12. Segmental volumes for all the segments, except Automotives and Chemicals, had increased in the Apr 1 to May 12 time frame. According to Knight, overall volumes had also increased 4% in the same period.

It is to be noted that Union Pacific’s prudent cost management is also a positive. This, in turn, should drive the bottom line in the second quarter. Meanwhile, the company that achieved an operating ratio of 65.1% in the first quarter expects the metric to improve further in 2017.

Currently, Union Pacific is on track to achieve its guidance of around 60% by 2019. Its peers like Canadian National (CNI - Free Report) and Norfolk Southern (NSC - Free Report) ) are also aiming to drive earnings by controlling costs.

Additionally, Union Pacific’s efforts to constantly reward shareholders through dividends/buybacks are encouraging. An update on the issue will be awaited on the second-quarter conference call.

Another Stock to Consider

Investors interested in the broader transportation space may also consider American Airlines Group (AAL - Free Report) as our model shows it possesses the right combination of elements to post an earnings beat in the first quarter.

American Airlines has an Earnings ESP of +2.75% and a Zacks Rank #1. The company will report second-quarter 2017 results on Jul 28.

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