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Will Weak Shipments Mar Union Pacific's (UNP) Q3 Earnings?

Zacks Equity Research

Union Pacific Corporation UNP is scheduled to report third-quarter 2019 results on Oct 17, before market open.

The Zacks Consensus Estimate for third-quarter earnings has been revised downward 5.7% in the past 90 days. Given this backdrop, let’s delve into the factors that might have influenced the company’s performance in the September quarter.

As was the case in the first two quarters of 2019, weak freight revenues due to declining shipments are likely to have hurt the company's third-quarter performance. As an evidence, the company’s executive vice president and chief financial officer Robert Knight stated at the Cowen & Company 12th Annual Global Transportation Conference on Sep 4, 2019 that overall volumes for the September quarter as of Sep 1, 2019 decreased 7% on a year-over-year basis.

The above unfavorable reading can be primarily attributed to a double-digit decline in volumes at the Premium (down 10%) and Energy divisions (down 14%). Volumes at the company’s Premium division are being hurt by waning international and domestic intermodal shipments, chiefly due to the ongoing trade tensions between the United States and China.

Until the same date, demand for soybean and international container also dropped significantly, thanks to the trade-war tensions. Management stated that the United States is responsible for providing about a third of soybeans to China.

As of Sep 1, 2019, volumes at the Energy division fell 14% due to a 17% decrease in coal volumes and a 42% reduction in sand carloads. Meanwhile, at the company’s Agricultural Product unit, volumes dipped 2% mainly due to a 6% deterioration in food and beverage shipments and a 5% reduction in fertilizer carloadings. In fact, the Zacks Consensus Estimate for third-quarter 2019 freight revenues is currently pegged at $5,433 million, indicating a 2.3% decline from the year-ago reported figure.

However, the company’s efforts to reduce costs in a bid to improve efficiencies are likely to have positively impacted Union Pacific’s third-quarter bottom-line performance. Union Pacific's cost-cutting plans might have led to an improvement in the operating ratio (operating expenses as a percentage of revenues). Notably, lower the value of the metric the better.

Union Pacific Corporation Price and EPS Surprise


Union Pacific Corporation Price and EPS Surprise

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

Highlights of Q2 Earnings

In the last reported quarter, United Pacific reported earnings of $2.22 per share that surpassed the Zacks Consensus Estimate by 10 cents. The bottom line also increased 12.1% on a year-over-year basis, primarily owing to lower costs. However, operating revenues slipped 1.3% year over year due to sluggish freight revenues.

What Does Our Model Say?

The proven Zacks model does not conclusively show that Union Pacific is likely to beat estimates in the third 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.

Zacks Rank: Union Pacific carries a Zacks Rank #3, which increases the predictive power of ESP.

Earnings ESP: Union Pacific has an Earnings ESP of -0.58%, which acts as a spoiler as the combination now leaves surprise prediction inconclusive. The Most Accurate Estimate is pegged at $2.30, which is a penny below the Zacks Consensus Estimate.

Stocks to Consider

Investors interested in the broader Transportation sector can check out Expeditors International of Washington EXPD, Allegiant Travel Company ALGT and Southwest Airlines LUV as these stocks possess the right mix of elements to beat on earnings in their next releases.

Expeditors has an Earnings ESP of +0.74% and a Zacks Rank of 3. The company will report third-quarter 2019 results on Nov 5.

Allegiant has an Earnings ESP of +6.14% and a Zacks Rank #2. The company will announce third-quarter earnings results on Oct 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

Southwest has an Earnings ESP of +0.31% and is Zacks #3 Ranked. This company will release third-quarter financial numbers on Oct 24.

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