Will Union Pacific (UNP) Q4 Earnings Fall Prey to Coal Woes?

Leading railroad operator, Union Pacific Corporation UNP, is slated to release its fourth quarter and full-year 2015 financial numbers before the market opens on Jan 21.

Last quarter, revenues at Union Pacific decreased 10% year over year to $5.56 billion, missing the Zacks Consensus Estimate of $5.65 billion. Declining coal shipments hurt quarterly results with volumes slipping 6% mainly due to coal woes. Apart from coal, decreasing volumes of industrial products and agricultural products also hurt the top line.

The company's earnings of $1.50 per share for the third quarter indicated a year-over-year decline of 2%. Our quantitative model doesn’t hint at an earnings beat in the upcoming fourth quarter as well.

Here is what our model indicates:

The possibility of Union Pacific beating the Zacks Consensus Estimate in the fourth quarter is rather low. This is because it lacks the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – that reflects the possibility of a positive earnings surprise.

Zacks ESP: Earnings ESP for Union Pacific is -1.41%. This is because the Most Accurate estimate is $1.40 while the Zacks Consensus Estimate is pegged higher at $1.42.

Zacks Rank: Union Pacific has a Zacks Rank #4 (Sell).

Note that stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions as is the case with Union Pacific. Fourth quarter earnings per share estimate for the company has gone down by 7 cents to $1.43 over the last 90 days.

Factors at Play

Headwinds related to coal are expected to mar Union Pacific’s fourth quarter results once again, as has been the case in the prior quarters of 2015. That the fourth quarter results will likely lag expectations was already hinted at by the company’s CFO Rob Knight at the Credit Suisse industrial conference in Florida last month. Fourth quarter 2015 earnings are expected to decline on a year-over-year basis hurt by declining volumes.

We believe adverse foreign currency movements characterized by the strength of the dollar, lower fuel surcharges received from customers due to declining fuel costs and slow carload growth from the energy sector will also hurt the Omaha, NE-based company’s fourth-quarter results.

In view of the bleak scenario, it is a no-brainer that declining coal shipments will hurt the company’s results in the fourth quarter. In fact, coal continues to be a major bother for railroad operators like Union Pacific. While exports continue to be affected by a strong dollar, softness in the energy sector has encouraged utilities to switch to natural gas (a much cheaper alternative).

With the slowdown in coal shipments hurting the top line and the impact likely to continue, the struggling railroads are looking to cut costs to drive bottom-line growth. For example, according to an Associated Press report in August, Union Pacific intends to eliminate multiple management jobs. We expect further updates on the cost cutting measures at Union Pacific on the fourth quarter conference call.

Upcoming Railroad Releases

Apart from Union Pacific, railroad operators like Kansas City Southern KSU and Norfolk Southern Corp. NSC are slated to unveil their respective fourth quarter results on Jan 22 and Jan 27. We believe results of both these companies will also tend to be impacted by coal-related headwinds.

A Transportation Gem

With railroads struggling big time, we believe investors interested in the broader transportation space should look elsewhere for companies likely to beat the Zacks Consensus Estimate in the fourth quarter. One such company is American Airlines Group AAL which sports an earnings ESP of +1.55% and a Zacks Rank #1. The carrier is slated to release its fourth quarter results on Jan 29, before market opens.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
KANSAS CITY SOU (KSU): Free Stock Analysis Report
 
UNION PAC CORP (UNP): Free Stock Analysis Report
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
AMER AIRLINES (AAL): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research