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Union Pacific Trims 2H19 Volume View Amid Trade Tensions

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Union Pacific Corporation (UNP - Free Report) issued a drab forecast for overall volumes at the Cowen & Company 12th Annual Global Transportation Conference, mainly due to the trade-war related issues. The company’s executive vice president and chief financial officer, Robert Knight, stated that overall volumes for the third quarter of 2019 decreased 7% on a year-over-year  basis (as of Sep 1, 2019).

The unfavorable reading can be primarily attributed to double-digit declines in volumes at the Premium (down 10%) and Energy divisions (down 14%). Volumes at the company’s Premium division are being hurt by declining international and domestic intermodal shipments chiefly due to the ongoing trade tensions between the United States and China.

Demand for soybean and international container also decreased significantly, thanks to the trade-war tensions. Union Pacific stated that the United States is responsible for providing about a third of soybeans to China. As of Sep 1, 2019, volumes at the Energy division declined 14% due to a 17% decrease in coal volumes and a 42% reduction in sand carloads. Meanwhile, at the company’s Agricultural Product unit, volumes decreased 2% mainly due to a 6% decline in food and beverage shipments and a 5% reduction in fertilizer carloadings.

What is worse is that the company’s volumes are likely to persistently decline throughout 2019. For the second half of 2019, Union Pacific now expects volumes to decline in mid-single digits compared with the 2% reduction predicted earlier.

However, Union Pacific’s outlook with respect to operating ratio (operating expenses as a percentage of revenues) remains unchanged as it looks to check costs for countering revenue woes due to sluggish demand.

For the current year, operating ratio is expected to be below 61%. By 2020, the metric is expected to be below 60%.  Notably, lower the value of the metric the better.

Zacks Rank & Key Picks

Union Pacific carries a Zacks Rank #3 (Hold). Better-ranked stocks in the Transportation sector are Allegiant Travel Company (ALGT - Free Report) , Copa Holdings (CPA - Free Report) and Canadian National Railway (CNI - Free Report) . While Allegiant Travel and Copa Holdings sport a Zacks Rank #1 (Strong Buy), Canadian National carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allegiant Travel, Copa Holdings and Canadian National have an earnings growth rate of 30.9%, 15.9% and 13.8%, respectively, for the next three to five years.

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