Is Union Pacific a Buy in 2016?

When Union Pacific (UNP) reported its third quarter in October 2015, certain positives related to its operations became apparent. Despite the weakness in coal demand and crude oil prices last year, Union Pacific was able to post positive margins as well as cash flows.  Even the US vehicle market was not as good in the third quarter as it looked after the reporting of October and November sales by the automobile companies. Of course, the top line did decline.

Making good efforts

But Union Pacific made prudent efforts that improved its operational efficiency and productivity.
Union Pacific took steps to resize the business. The company made some manpower adjustments by keeping around 2700 TE&Y employees either furloughed or in alternative work status and also reduced the number of running trains by 140 compared to the end of the second quarter. The train lengths were also increased to set a record in nearly all major categories.

That led to a 4 % decline in the number of cars switched and hence to the achievement of efficiency gains within terminals. In the fleet involved in coal transportation, the productivity improved 6 % sequentially from the second quarter levels despite decline in volumes transported. The result was a record breaking operating ratio of 60.3 % and a higher free cash flow compared to the first nine months of 2014.

But that was in quarter three. The fourth quarter has ended and will be reported later this month. We have got some idea of the market condition up to mid-November. We know coal is not going to rise anytime soon because natural gas has become the new favorite of the power industry. Secondly, a lot will depend on how the oil market behaves. If oil prices pick up, a lot of problems will be solved for Union Pacific. More help could come from the US automobile industry in terms of higher demand. Further, the need for transportation of agricultural products is bound to increase. And railroads are bound to get a good portion of that.


The prospects of railroad and hence, Union Pacific can be said to be 50-50 at the moment. There is no problem at all in the internal preparation to fight the on-going downturn in various sectors. But such a large service industry needs more than that. Support has to come from the various segments that Union Pacific serves. And with a very bad 2015 for some of them, and Union Pacific stock down 35 % in less than last one year, the chances of an upside seem to be higher. Thus, investors will have to keep in mind the horizon for a recovery of more than one industry in mind before setting a horizon for investing in Union Pacific.
Published on Jan 11, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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