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Why You Should Get Rid of Union Pacific Ahead of Q4 Earnings

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Union Pacific Corporation UNP is a stock that investors would do better to discard from their portfolios at the moment.

The negative sentiment surrounding the stock is evident from the Zacks Consensus Estimate for fourth-quarter 2018 earnings (scheduled to be released on Jan 24) being revised nearly 1% downward in the last 60 days. The same for full-year earnings has been trimmed by 3 cents. The company also has a VGM Score of D. Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of all three scores.

Let’s delve into the factors responsible for the stock’s dismal performance.

Union Pacific’s high operating expenses are concerning. Operating costs have increased 8% in the first nine months of 2018, mainly due to a 41% rise in fuel-related expenses. The high operating expenses have potential to hamper bottom-line growth going forward.

Additionally, declining coal volumes due to pricing pressures might hurt the company’s fourth-quarter results. At the Credit Suisse 6th Annual Industrials Conference held last November, the company stated that fourth-quarter volumes at the energy and agricultural segments dropped 10% and 4%, respectively, as of Nov 25.

The company’s high debt levels are another downside. Debt/EBITDA ratio (adjusted) at Union Pacific is anticipated to increase to up to 2.7 in 2020. The ratio was 1.9 in 2017.  A high Debt/EBITDA ratio often indicates that a company might be unable to service its debt appropriately.

In terms of price-to-book ratio, which is often used to value railroads, the stock's valuation appears to be unfavorable compared with the market at large. The company currently has a trailing 12-month P/B ratio of 4.9 compared with the industry’s average of 4.3.

Due to these headwinds, shares of the company have shed more than 2% of value in the past six months.

The company carries a Zacks Rank #4 (Sell).

Key Picks

Some better-ranked stocks in the broader Transportation sector are United Continental Holdings UAL, Spirit Airlines (SAVE - Free Report) and Azul AZUL. While United Continental holds a Zacks Rank #2 (Buy), Spirit Airlines and Azul flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of United Continental, Spirit Airlines and Azul have rallied more than 24%, 29% and 16%, respectively, in 2018.

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