Union Pacific (UNP, Financial), the largest publicly traded U.S. railroad company, released strong results for the second quarter. The company posted an impressive 17% growth in the profit. The company was able to post good results as the railroad hauled 8% more freight and raised shipping charges. It is been expected by the analysts that better performance can be expected from Union Pacific and it is expected to deliver impressive performance for the investors in future. Let us have a look at whether Union Pacific can further improve its market share.
Good numbers
In the recently reported quarter, Union Pacific posted a 10% growth in its revenue to $6.02 billion from $5.47 billion in the same quarter a year earlier beating Wall Street forecasts. The analysts had been expecting $5.98 billion. Union Pacific posted earnings of $1.43 per share which came in line with the consensus estimates.
Union Pacific is going well with the improvement in the railroad freight and the rising shipping rates. The company is pleased with commendable performance in almost every segment including agricultural, automotive, intermodal, and industrial and coal shipments. But, Union Pacific was found weak in the chemical segment which declined by 1% mainly due to the decline in the crude oil shipments. But the forecasts say that there is much steam for the company in the future for better performance as the industry is growing and is showing no signs of fading away soon.
Better times ahead
Union Pacific is anticipating that the economy is turning favorable. For example, Union Pacific is seeing a huge shipment demand for grains which are meant to export from the regions such as Mexico and China; coal, the main item for it to ship, is seeing continuous demand. Another exciting fact that is increasing the shipment is the higher natural gas prices which are ramping up demand for the thermal coal.
From its core six areas of business it is expecting better performance. It is expecting weather to be favorable for crops and it is expecting better crop year which will improve its shipments in the agriculture category similarly it is also seeing good demand for ethanol.
Moving on, as the automotive segment is coming into shape again and the economy is recovering, Union Pacific is expecting better demand for shipments from the automotive segments as the ramp up of sales of the automotive will increase the demand for both finished vehicles and auto parts. Similarly, the low inventory levels and higher natural gas prices are expected to drive demand for coal in the third quarter.
This indicates that the overall demand is increasing, and the company is seeing good opportunities in future. But, Union Pacific is expecting the demand for the crude oil to decline further which can eat its profit margins in the chemical segment.
Segments are doing well
Moving ahead to its industrial products segment, Union Pacific is expecting to benefit largely from shale-related activity as the company is getting demand for the shipment of Frac Sand. The reports on the other hand reveal that the housing market is strengthening and Union Pacific is further optimistic about this growth.
Another area of focus for Union Pacific is improvement of network performance which will help the company to better serve the customer demand. Union Pacific is making significant moves to provide customers with a value proposition that supports growth with a high level of service. It is investing in surge resources and network capacity to achieve operational efficiency which will help the company to deal with the growing network challenges. While Union Pacific will be laser focusing on reducing variability in the network which is important for generating sequential improvement.
Conclusion
With trailing P/E of 21.99 Union Pacific looks reasonable. Also its forward P/E (16.99) shows good improvement in earnings further. Further as the economy is moving well towards recovery and the good weather and increase automotive sales will surely increase Union Pacific’s shipment. So from investment perspective Union Pacific is a good pick as of now.
