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Cost-Cut Strategies Drive Union Pacific (UNP), High Debt Ails

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Zacks Equity Research
·2 min read
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We recently issued an updated report on Union Pacific Corporation UNP.

We are encouraged by the company's efforts to check costs in a bid to drive the bottom line. Operating expenses contracted 11% to $11,699 million in 2020. Increased efficiency from the precision scheduled railroading model contained costs.  

Operating ratio (operating expenses as a percentage of total revenues) in 2020 was positively impacted to the tune of 130 basis points (bps) by lower fuel prices. Notably, lower the value of the metric the better. The company expects 2021 adjusted operating ratio to improve between 150 bps and 200 bps from 2020 levels. The company aims to achieve an operating ratio of 55% over the long term.

Despite the recent improvement, freight revenues continue to be weak year over year. Freight revenues, down 10% in 2020, are being hurt, mainly by coronavirus-induced depressed volumes (down 7% in 2020).

We are concerned about Union Pacific's high-debt levels. Debt/earnings before interest, taxes, depreciation and amortization (EBITDA) ratio (adjusted) increased to 2.9 at the end of 2020. Adjusted debt at 2020-end increased 1.5 billion from 2019 levels to $28.9 billion. A high debt/EBITDA ratio often indicates that a firm may be unable to service its debt appropriately.

Zacks Rank & Stocks to Consider

Union Pacific currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Zacks Transportation sector are Triton International Limited TRTN, FedEx Corporation FDX and Herc Holdings Inc. HRI. FedEx carries a Zacks Rank #2 (Buy), while Triton and Herc Holdings sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings per share (three to five years) growth rate for Triton, FedEx and Herc Holdings is pegged at 10%, 12% and 31.2%, respectively.

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Union Pacific Corporation (UNP) : Free Stock Analysis Report
 
FedEx Corporation (FDX) : Free Stock Analysis Report
 
Triton International Limited (TRTN) : Free Stock Analysis Report
 
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Zacks Investment Research