(The following story by Ann Heffron appeared at Zacks.com on September 16.)
NEW YORK — We are retaining our Hold on Union Pacific Corp. (UNP), as well as our $80 target price. UNP will report third quarter results on October 23. We are maintaining our 2008 diluted EPS estimate at $4.15, near the high end of management’s increased $4.00-4.20 range (up from $3.88-4.13 before), and our 2009 EPS estimate at $5.
UNP should benefit from higher rates on contract renewal pricing and improved productivity, which should offset expected volume weakness and higher fuel costs. UNP posted second quarter EPS of $1.02, up 24% year-over-year, and better than consensus of $0.92 and our estimate of $0.91, largely due to higher-than-expected revenue growth.
Revenues advanced 13% as higher rates (revenue per car up 16%) offset a 3% volume decline. UNP recently increased its dividend by 23%, following a 26% in 2007’s fourth quarter.
The company repriced 7% of its business in 2007 and has the opportunity to reprice an additional 6% in 2008. Fuel conservation, which saved about 21 million gallons of fuel in 2007 and 19 million gallons in 2008’s second quarter, will continue to be a top priority.
The slowing macroeconomic environment in the U.S. is expected to have a negative impact on top-line revenue growth for UNP during 2008. Weakness in the auto and housing sectors and flooding in the Midwest contributed to a 3% decline in volume, as measured by revenue carloads, in 2008’s second quarter. Moreover, UNP-estimated 2008 volume is estimated by the company at down 1%.