'Rail-ing' In The Profits - Union Pacific Steaming Towards New Highs

Core Viewpoint - Union Pacific is showing signs of recovery and potential growth under the leadership of new CEO Jim Vena, with improved operational metrics and a focus on profitability despite a challenging manufacturing environment [2][6][22]. Financial Performance - In Q1 2024, Union Pacific reported a 1% increase in volumes and a 3% growth in operating income, with an adjusted debt/EBITDA ratio below 3x, indicating improved financial health [6][15]. - Q2 2024 results showed operating revenues of $6 billion, slightly missing estimates by $60 million, while quarterly EPS was $2.74, beating consensus by $0.03 [7][8]. - The company achieved a 60% operating ratio, a significant accomplishment in a high-cost environment, with operating income increasing by 9% to $2.4 billion [7][8][14]. Revenue Breakdown - Revenue from bulk commodities decreased by 2% year-over-year, primarily due to a 21% decline in coal, while industrial revenue increased by 2%, driven by chemicals and plastics [10][11][12]. - The premium segment, including automotive and intermodal, saw increases of 5% and 3% respectively, although automotive volumes are expected to decelerate [13][11]. Operational Efficiency - Fuel efficiency improved by 1% to 1.08 fuel per 1,000 GTMs, reflecting enhanced operational performance [9]. - Operating expenses decreased by 4% year-over-year, indicating effective cost management despite rising input costs [14]. Market Outlook - The industrial sector is showing signs of recovery, with strategists optimistic about renewed demand for machinery and industrial products as manufacturing activity stabilizes [7][12]. - Union Pacific's outlook remains mixed, with uncertainty in second-half volumes, but the company is committed to a $1.5 billion share repurchase program by 2024 [15][22]. Valuation and Growth Potential - Union Pacific is trading at a forward PE of 19.7 for 2025, suggesting it is undervalued compared to the S&P 500's PE of 27.5, with expected EPS growth of 10-12% per year [20][21]. - The combination of a 2.2% dividend yield, share buybacks, and operational improvements could lead to annual returns exceeding 15%, with stock prices projected to rise above $310 by 2026 [22].