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Union Pacific Gains From Cost Cuts Amid Coronavirus Woes

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We recently issued an updated report on Union Pacific Corporation (UNP - Free Report) .

Like many other transportation companies, Union Pacific is hit by uncertainties related to the COVID-19 pandemic.

The coronavirus outbreak caused disruptions in China’s supply chain starting in mid-February followed by the closure of the U.S. automotive plants in March-end. Both freight revenues and volumes declined during the first quarter. The impact is likely to be more negative in the second quarter, where volumes are anticipated to plunge approximately 20%. Due to the bleak volume projection, operating ratio (operating expenses as a percentage of revenues) will not improve in the second quarter on a year-over-year basis, despite cost-cutting measures. Also, due to the COVID-related uncertainty, Union Pacific withdrew its 2020 guidance with respect to operating ratio, headcount, volumes and buybacks.

High-debt levels are also worrisome. Union Pacific's debt/EBITDA ratio (adjusted) increased to 2.5 at the end of 2019 and 2.7 at the end of first-quarter 2020. A high debt/EBITDA ratio often indicates that a firm may be unable to service its debt appropriately.

However, the company's cost cutting strategies are impressive. In first-quarter 2020, the bottom line improved 11.4% on a year-over-year basis, primarily due to low costs. Operating expenses contracted 10% to $3,086 million. Additionally, operating income in the first quarter increased 9% year over year to $2,143 million.

Though the company withdrew its guidance for share buybacks, it continues to pay out dividends.  This signifies its financial strength. Union pacific intends to mainatin its dividend payout ratio between 40% and 45% in the long term. Moreover, its ability to generate free cash flow ($688 million in the first quarter, up 25% year over year) is a positive and supports its dividend-paying capacity.

Zacks Ranks & Key Picks

Union Pacific currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Zacks Transportation sector are Air Lease Corporation (AL - Free Report) , Ryanair Holdings plc (RYAAY - Free Report) and Teekay Tankers Ltd. (TNK - Free Report) . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings (three to five years) growth rate for Air Lease, Ryanair Holdings and Teekay Tankers is estimated at 3.1%, 20.5% and 3%, respectively.

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