Cowen: Can UP Drive to 55?
Written by William C. Vantuono, Editor-in-Chief
Union Pacific photo
At Union Pacific’s Investor Day, where achievements in operational efficiency, benefits of PSR implementation, shareholder returns and financial outlook were discussed, management predicted that the railroad will achieve a 55% OR (operating ratio) by 2022. As a result, Cowen and Company modestly adjusted its 2022 assumptions.
“We modestly increase our price target to $231 from $230 and reiterate Outperform,” said Cowen Managing Director and Railway Age Contributing Editor Jason Seidl. “We adjust our 2022 EPS estimate to $11.00 from $10.95, based on the new OR assumption. Using our 21x multiple and our adjusted EPS estimate, our price target increases $1 to $231.”
“UP is one of the best-managed North American Class I railroads and the only western one that is publicly traded,” Seidl noted. “The company has made great strides toward improving its OR through the adoption of Precision Scheduled Railroading. With better rail service, we believe the focus will shift toward growing the top-line. PSR has made a clear impact in operational performance. Since 2018, freight car velocity has increased 6%, dwell time has decreased 21%, productivity has increased 30%, and workforce productivity has increased 19%.
“During the past two years, UP has returned more than $25 billion to shareholders via dividends($7.5 billion) and share repurchases ($17.7 billion). Since 2018, it has repurchased 15% of its average market cap, an aggressive buyback program that outpaces its peers. We continue to model aggressive buybacks in 2021 and 2022.
“Management offered some high-level guidance as we look into 2022-2024, which called for volume growth of ~3%, capital investments of less than 15% of revenue, ROIC of 17%, continued cash to shareholders via buybacks and dividends, and an OR of at least 55%i n 2022. We adjust our model by 10bps of OR improvement to 55% in 2022, which increased our 2022 EPS estimate by $0.05.
“As outlined in the company’s earnings call in April, product mix and coal will be a headwind, offset by intermodal growth. Carloads have been negative for the past two years for UP, and we are encouraged by management’s optimism in its ability to grow carloads in 2021. While we like the optimism in the longer term volume guidance, we note this is not the first time the company had such an outlook. While the macroenvironment is out of its control, the company can impact its traffic outlook. Improving service reliability, increasing supply chain visibility and focused marketing on rail (from an environmental perspective) should help.
“On the upside, the economy gradually shifts into higher gear, weather patterns become favorable for coal demand, and PSR implementation is better than expected. On the downside, coal weakness intensifies, the economy falters and PSR implementation doesn’t go as planned.”
