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Union Pacific Battles Low Freight Demand: Time to Dump?

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Union Pacific Corporation (UNP - Free Report) , which derives bulk of its revenues from freight, has been plagued by the soft freight scenario in the United States. Evidently, freight revenues dipped 2% in the first half of the year with volumes (measured in revenue carloads) contracting 3%. Moreover, with escalating trade tensions between the United States and China, volumes are likely to remain suppressed in the remainder of the year. As a result, the company trimmed its volume growth outlook for the second half of the year. It now anticipates volumes to decline in mid-single digit compared with the 2% reduction predicted earlier.

The company’s commentary at the Cowen & Company 12th Annual Global Transportation Conference on third-quarter performance is a further proof of this dismal scenario. At the conference, the company’s executive vice president and chief financial officer Robert Knight stated that as of Sep 1, 2019, overall volumes in the third quarter decreased 7% on a year-over-year basis. The unfavorable reading can be attributed primarily to double-digit volume declines at the Premium (down 10%) and Energy divisions (down 14%).

Additionally, the ongoing Sino-US trade tussle is affecting volumes at Union Pacific’s Premium division due to weak international and domestic intermodal shipments. The trade dispute also weighed on the company’s demand for soybean and international container. Moreover, volumes at the Energy division fell 14% (as of Sep 1, 2019) in the current quarter due to 17% and 42% decrease in coal volumes and sand carloads, respectively. Further, at the company’s Agricultural Product unit, volumes slipped 2% mainly due to a 6% drop in food and beverage shipments and a 5% reduction in fertilizer carloadings.

Union Pacific Corporation Price and Consensus

Union Pacific's high debt levels further add to its woes. The company’s Debt/EBITDA ratio (adjusted) increased to 2.3 in 2018 from 1.9 in 2017. It further deteriorated to 2.5 in the second quarter of 2019.  A high Debt/EBITDA ratio often indicates that a firm may be unable to service its debt appropriately. Moreover, the company's investment in enhancing its facilities is inducing higher capital expenditures. As a consequence, capex stood at $1.6 billion in the first half of 2019. The same is expected to be around $3.2 billion for the full year. As a result, this is likely to limit the company’s bottom-line growth going forward.

Amid this pessimism, the Zacks Consensus Estimate for the company’s current-quarter earnings has been revised 2.9% downward in the last 60 days. The same for 2019 earnings has been moved 1.2% south. The company’s VGM Score of D further highlights its short-term unattractiveness.

The above-mentioned factors and the unfavorable readings clearly justify the company’s Zacks Rank #4 (Sell) and we believe, investors should discard this stock from their portfolios for the time being.

Key Picks

Some better ranked stocks in the broader Transportation sector are Kansas City Southern (KSU - Free Report) , GATX Corporation (GATX - Free Report) and Fly Leasing Limited (FLY - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Kansas City Southern, GATX Corporation and Fly Leasing have gained more than 38%, 9% and 92%, respectively, so far this year.

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