The U.S. railroad giant Union Pacific Corp. (UNP) expects unusually warm weather to hurt coal shipments in the ongoing quarter ending March 31.
While the company expects a 7% drop in coal volumes, its chemical shipments are expected to grow 9–10% in the first quarter. Overall shipments have shown an increase of 2% so far in the year. We expect the trend of overall volume growth to continue throughout the year especially in business groups including automotive, chemicals, energy and industrial products driven by the ongoing productive and cost-control measures.
The Chemical business is expected to generate solid growth, particularly in minerals and petroleum, driven by the opportunity in shale energy to move both inbound materials and outbound products. Strength in domestic Intermodal volume is expected to stem from the ongoing highway conversion while automotive volume would benefit from strong shipments and rising demand.
Further, the growth in industrial products is expected to be driven by the strength in export iron ore and healthy steel shipments, which would benefit from the continued recovery in the auto industry. Moreover, the company expects the new utility business in Texas and Wisconsin and improved production in Utah-Colorado region to drive non-Powder River Basin coal volumes.
Nevertheless, the near-term growth for Union Pacific is expected to be tempered by lower Southern Powder River Basin (SPRB) coal, agriculture and international Intermodal volumes that will likely weigh on top-line growth going forward.
The company expects the loss of two legacy contracts last year, soft demand for some utilities due to somewhat milder-than-average winter and higher stockpiles to restrict the growth at SPRB for the next several quarters. International intermodal volume will remain under pressure due to weak container imports and contract losses while agriculture volumes will be fragile due to weak food and beverages, feed grains and export grains.
Further, stiff competition from major rivals like Norfolk Southern Corp. (NSC), CSX Corporation (CSX) and Kansas City Southern (KSU), unionized workforce, steeply rising fuel prices, increased railroad regulation as well as high barriers to entry might limit the potential upside for the stock.
We are currently maintaining our long-term Neutral recommendation on the stock. For the short term (1-3 months), the stock holds a Zacks #2 (Buy) Rank.
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