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Union Pacific (UNP) Hurt by Sluggish Volumes & High Debts

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Recently, we issued an updated research report on Union Pacific Corporation (UNP - Free Report) . The company is witnessing sluggish overall volumes (measured by total revenue carload) due to weakness in key divisions. Due to weak volumes, freight revenues, which account for a bulk of its top line, are declining. Notably, freight revenues were down 4% in the first nine months of 2019.

The same is likely to affect Union Pacific’s fourth-quarter results, scheduled to be released on Jan 23, 2020. In fact, the company issued a drab forecast for overall volumes at the Credit Suisse 7th Annual Industrial Conference in December, thanks to headwinds ranging from trade tensions to economic slowdown.

The company’s chief financial officer, Robert Knight, stated that overall volumes for the fourth quarter of 2019 are expected to decrease a little more than 10% on a year-over-year basis. At the same conference, Union Pacific stated that the top line for the December quarter is anticipated to decline by a similar percentage as volumes.

Moreover, its high debt levels are concerning. Notably, the debt/EBITDA ratio (adjusted) increased to 2.6 as of Sep 30, 2019, from 2.3 at 2018-end. Additionally, the massive capex might be a spoilsport.

Due to the above-mentioned headwinds, shares of Union Pacific have underperformed the S&P 500 index over the past six months. The stock has gained 5.8%, while the index appreciated 9.8% in the same time frame.

Estimate Revisions & Zacks Rank

Downward estimate revisions highlight the pessimism surrounding the stock. The Zacks Consensus Estimate for fiscal 2020 earnings has been revised 1.7% downward over the past 60 days.

Given this bleak backdrop, Union Pacific’s Zacks Rank #4 (Sell) is well justified.

Stocks to Consider

Investors interested in the Zacks Transportation sector can consider  Hawaiian Holdings (HA - Free Report) , Ryanair Holdings (RYAAY - Free Report) and GATX Corporation (GATX - Free Report) . While Hawaiian Holdings and Ryanair Holdings sport a Zacks Rank #1 (Strong Buy), GATX carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Hawaiian Holdings, Ryanair Holdings and GATX have gained more than 12%, 21% and 19%, respectively, in a year’s time.

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