Sell-Side Offers Opposing View Of Union Pacific

Union Pacific Corporation UNP reported second-quarter results which turned Raymond James incrementally bullish while Morgan Stanley maintained its bearish stance.

The Analysts

Raymond James' Patrick Tyler Brown maintains a Strong Buy rating on Union Pacific with a price target lifted from $190 to $197.

Morgan Stanley's Ravi Shanker maintains at Underweight, price target lifted from $128 to $140.

Bernstein's David Vernon maintains at Hold, $177 price target.

The stock traded around $174.97 per share Friday afternoon.

Raymond James: Clear Path For OR Improvement

Union Pacific's report was highlighted by EPS of $2.22 versus estimates of $2.16, which Brown said was "impressive" given flooding related headwinds in the quarter. Core operating improvement "once again shined" despite falling volumes of 4%.

The company also showed a "whopping" 340 basis point year-over-year operational ratio improvement to 59.6%, the analyst wrote. This is an all-time quarterly record and management offered a clear path towards incremental improvements to the "sub-61%" level, inclusive of at least $500 million of net productivity.

Union Pacific's self-help drivers look to have a "long runway" before optimal levels can be achieved. As such, the case for turning incrementally bullish on the stock can be justified.

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Morgan Stanley: Small Beat Against Low Expectations

Union Pacific delivered a beat against already lowered expectations, Shanker wrote in a note. For example, adjusting EBIT to remove a $32 million payroll tax gain brings EBIT to $2.23 billion versus the Street's estimate of $2.195 billion. In fact, consensus EBIT estimate moved 9% lower since May so put in perspective the beat "could come as a disappointment."

Meanwhile, pricing growth of 2.75% in the quarter fell short of expectations of 3% and Shanker said this makes the fourth consecutive quarter that pricing growth is below RCAF inflation.

Bernstein: 'Strong Enough'

Union Pacific's earnings print was "strong enough" to support the stock although it falls short of laying the case for higher forward estimates, Vernon wrote in a note. The report also shows the company is "executing well with the cards they are dealt" although expectations for any improvements over the next year is minimal.

Vernon said expectations for lower volume, moderating fuel tailwinds and softening core prices from market conditions could result in earnings misses. Specifically, Union Pacific's financial metrics falling short of the consensus estimate by 2%-3% in 2019 and by 4%-5% next year.