Union Pacific Corporation (UNP) the largest railroad provider in North America recently declared its capital investment plan. The company plans to invest $3.6 billion for fiscal 2012. We believe that UNP is making such hefty investments to support the strong growth opportunities and improve its operating efficiencies.
As the U.S. economy recovers, the company remains committed to invest around 17-18% of its total revenue in the coming several years as a part of its long term investment plan. UNP plans to invest in purchasing new locomotive and freight cars, building intermodal terminals, double tracking the sunset corridor, modernizing the safety equipment and various other projects in the southern region. Apart from these, the company plans to invest an additional $2 billion on the Positive Train Control (:PTC) mandate – a technology designed to track and control train movements to improve safety – through 2015.
According to Association of American Railroads (:AAR), given the various ongoing infrastructures projects, the railroad companies would continue to invest impressively. Seven of the class 1 railroads are expected to invest around $13 billion in 2012, following investments of $10.7 billion and $12.0 billion in 2010 and 2011, respectively. Of the $13 billion expected to be invested this year, UNP alone is likely to contribute around $3.6 billion.
North America’s freight railroad carriers generally operate on the infrastructure which they own and maintain. Hence, they are focused towards expanding and upgrading their network so that they can offer their services in an efficient and cost effective manner. Despite the current concern regarding the shipment of utility coal, the railroads continue to perform impressively based on the higher demand of U.S. export coal particularly in Asia, along with rising demand from the automotive sector. Additionally, the ongoing truck to rail conversion also bodes well for the rail freight carriers.
However, class1 railroads like Norfolk Southern Corp. (NSC) CSX Corp. (CSX) Canadian National Railway Company (CNI) face headwinds due to certain regulatory changes which include the Positive Train Control (:PTC) mandate, expansion of truck size and weight and, others. Despite these negatives we believe that these investments would help UNP improve its efficiencies.
Recommendation: Considering these factors, we maintain our long-term Neutral recommendation on Union Pacific Corporation. Currently, Union Pacific has a Zacks #3 Rank, implying a short-term hold rating on the stock.
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