Thursday, April 23, 2009

UP first-quarter net slips, but beats Street

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Union Pacific reported its first-quarter net income fell 18% to $362 million, or 72 cents per share, down from first-quarter 2008’s $443 million, or 85 cents a share. But the railroad still beat Wall Street analyst consensus estimates of 66 cents per share.

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UP Chairman and Chief Executive Jim Young said the economic environment continued to hurt volumes. Revenue dropped 20% to $3.42 billion, mirroring a decline in volume of 21% during the quarter.

"In the first quarter, we experienced one of the most challenging business environments we've ever seen," Young said during a conference call with analysts. 

Shares of UP were up 3.21% in Thursday morning trading on the New York Stock Exchange.

Dahlman Rose & Co. said that, based on first-quarter performance, it's raising its 2009 EPS estimate for UP from $3.50 to $3.70 as well as its 2010 EPS forecast from $4.00 to $4.30. "Accordingly we are increasing our price target for Union Pacific by $4 to $60," said Director Equity Research Jason Seidl, a Railway Age contributing editor. "Although the economy will undoubtedly provide near term challenges for UP, the railroad has clearly showed us its ability to truly weather the storm. Indeed, once freight levels eventually return, UP has ample capacity to take them on without spending significant excess capital. We continue to believe that the company’s true operating ratio lies somewhere south of 70%. Accordingly, we reiterate our Buy rating on the company’s shares."

Said Morgan Stanley analysts William Greene and Adam Longson: "We've noted that UP will report the best 2009 EPS trend among rails or parcel given company-specific growth opportunities and fewer headwinds than peers. 1Q results give us even greater conviction.  Despite the worst volume decline (down 21%), UP's EPS fell only 15%—the best performance after BNSF, where volume fell only 14%.  Nearly as important, we believe that the first half of 2009 will mark the trough in both rail volumes and earnings, which we can't say for parcel. Rails are trading below mid-cycle multiples while other transports trade near peak.  With volumes declines likely to improve soon, and reasonable valuation with opportunity for multiple expansion, rails should be the best "early-cycle" play in freight at this point. UP remains our top pick. UP's productivity gains are likely more sustainable than other rails."