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With economic activities picking up in the United States as more and more people in the country get vaccinated, the freight scene is improving by the day. This bodes well for the railroad operators as freight revenues account for bulk of their top lines.
Highlighting this bullish scenario, management at Union Pacific UNP, which is one of the largest railroads in the country, stated at the UBS Global Industrials and Transportation Virtual Conference that overall volumes for the second quarter of 2021 expanded 26% as of Jun 2. Segment wise, volumes grew 43%, 14% and 13% at the Premium, Industrial and Bulk segments, respectively.
For 2021, overall volumes are expected to increase roughly 6% in from the 2020 actuals. Productivity worth $500 million is expected for the current year. Union Pacific still anticipates to repurchase shares amounting to roughly $6 billion in 2021. Additionally, the company expects a dividend payout ratio of approximately 45% (of earnings) for the current year.
With freight revenues rising and railroads looking to cut costs, another key metric — operating ratio (operating expenses as a % of revenues) — at Union Pacific is likely to improve 150-200 basis points in 2021 from the 2020 reading. Most other railroads are also bullish on their operating ratio. For example, at Norfolk Southern Corporation NSC, the operating ratio is expected to improve by more than 300 basis points in 2021 from the 2020 reported levels. Notably, the company aims to achieve an operating ratio of around 60% for the ongoing year
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 Landstar System, Inc. LSTR and Herc Holdings Inc. HRI, both sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term (three to five years) expected earnings per share growth rate for Landstar and Herc Holdings is projected at 12% and 42.9%, respectively.
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Union Pacific Corporation (UNP) : Free Stock Analysis Report
Norfolk Southern Corporation (NSC) : Free Stock Analysis Report
Landstar System, Inc. (LSTR) : Free Stock Analysis Report
Herc Holdings Inc. (HRI) : Free Stock Analysis Report
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