Will Weak Shipments Hurt Union Pacific's (UNP) Q2 Earnings?

Zacks Equity Research

Union Pacific Corporation UNP is scheduled to report second-quarter 2019 results on Jul 18, before market open.

In the last reported quarter, the company’s bottom line surpassed the Zacks Consensus Estimate. The metric also increased 15% on a year-over-year basis primarily due to lower costs.

In fact, this Omaha, NE-based railroad operator has an impressive history with respect to the bottom line. The company reported earnings beat in each of the trailing four quarters as the chart below shows.

Union Pacific Corporation Price and EPS Surprise

 

Union Pacific Corporation Price and EPS Surprise

Union Pacific Corporation price-eps-surprise | Union Pacific Corporation Quote

However, the company might falter in the to-be-reported quarter due to multiple headwinds including the soft freight scenario. Furthermore, the fact that the Zacks Consensus Estimate for second-quarter earnings has been revised 6.9% downward over the past 60 days does not bode well for the company.

Let’s delve deeper to unearth the factors likely to influence this railroad operator’s results in the to-be-reported quarter.

We expect Union Pacific's second-quarter 2019 results to be hurt by weak freight revenues due to declining shipments. At the Wolfe Research 12th Annual Global Transportation Conference, the company said that second-quarter volumes declined 2% on a year-over-year basis (as of May 19) owing to below-par performances of the Energy and the Premium divisions. Evidently, the Zacks Consensus Estimate for carloads at the Energy segment indicates a 6.9% decline from the figure reported at the end of 2018.

Highlighting the bleak scenario, in June, Union Pacific’s chief executive officer Lance Fritz stated that factors like trade uncertainty and inclement weather in the United States are resulting in soft shipping volumes. Weak freight revenues, which account for bulk of Union Pacific’s top line, are likely to dent second-quarter results.

According to the latest Cass Freight Shipments Index report, North-American freight shipments declined for six successive months starting from December, 2018.

However, the company’s efforts to reduce costs in a bid to improve efficiencies are expected to drive the bottom line in the second quarter. Union Pacific's cost-cut plans should also lead to an improvement in operating ratio (operating expenses as a percentage of revenues). The Zacks Consensus Estimate for operating ratio in the to-be-reported quarter stands at 61 compared with 63 reported a year ago. Notably, lower the value of the metric the better.

Earnings Whispers

Our proven model does not conclusively show that Union Pacific is likely to beat estimates in the second quarter. This is because a stock needs to have both — a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Union Pacific has an Earnings ESP of 0.00% as the Zacks Consensus Estimate of $2.12 is in line with the Most Accurate Estimate.

Zacks Rank: Union Pacific’s Zacks Rank #4 acts as a spoiler and leaves surprise prediction inconclusive.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Alaska Air Group  ALK, Canadian National Railway Company CNI and JetBlue Airways JBLU as these stocks too possess the right mix of elements to beat on earnings in the next releases.

Alaska Air Group has an Earnings ESP of +0.93% and a Zacks Rank of 2. The company will report second-quarter 2019 results on Jul 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

Canadian National is a Zacks #3 Ranked company and has an Earnings ESP of +0.88%. The company will release second-quarter 2019 results on Jul 23.

JetBlue Airways has an Earnings ESP of +2.07% and a Zacks Rank #2. This company is scheduled to announce second-quarter 2019 numbers on Jul 23.

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