Efficiency Investments And Renewable Expansion Will Improve Future Operations

Key Takeaways

• Strategic focus on operational excellence and infrastructure investments is expected to drive future earnings growth and improve network efficiency.
  
• Expansion in renewable diesel and Gulf Coast developments offers revenue opportunities, while pricing strategies aim to enhance net margins.
  
• Tariff uncertainties, coal demand decline, fuel fluctuations, inflation, and wage costs pose challenges to Union Pacific's revenue and margin stability.

Catalysts

Through its subsidiary, Union Pacific Railroad Company, operates in the railroad business in the United States.

• Union Pacific's strategic focus on operational excellence through efficiency improvements, such as productivity gains and buffer resource deployment, is expected to drive future earnings growth. These efforts demonstrate a commitment to streamlining operations, which should positively impact net margins and earnings.
  
• The continuous investment in capacity projects and infrastructure, such as siding constructions and terminal enhancements, is intended to support future growth initiatives and improve network efficiency. These initiatives are likely to enhance revenue potential by increasing business volume capacity.
  
• The expansion in renewable diesel facilities connected to Union Pacific's network and the ongoing industrial development projects in the Gulf Coast represent significant opportunities for revenue growth. This expansion capitalizes on diverse business mix and proximity to strategic markets, which could contribute to revenue increases.
  
• Union Pacific's pricing strategy aims to maximize core pricing gains while managing unfavorable business mix impacts. The company expects its pricing efforts to be accretive to operating margins in 2025, which should support net margin improvements.
  
• The ongoing technology advancements, workforce process improvements, and deployment of innovative solutions aim to further drive operational efficiency. This strategic focus is likely to contribute to long-term cost reductions, supporting improvements in both net margins and earnings.

Union Pacific Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Union Pacific's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.8% today to 30.0% in 3 years time.
• Analysts expect earnings to reach $8.3 billion (and earnings per share of $14.65) by about January 2028, up from $6.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2028 earnings, down from 22.4x today. This future PE is lower than the current PE for the US Transportation industry at 29.9x.
• Analysts expect the number of shares outstanding to decline by 2.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

Union Pacific Future Earnings Per Share Growth

Risks

• Uncertainties around tariff changes and potential regulatory changes could impact volumes and disrupt revenue growth, especially with regard to international trade and supply chain logistics.
  
• The potential decline in coal demand, despite new contracts, presents a risk to the bulk segment's revenue, as coal remains a significant part of their freight business.
  
• Lower fuel surcharge revenue, due to decreased fuel prices, negatively impacted freight revenue, highlighting sensitivity to fuel market fluctuations, which could affect net margins.
  
• Ongoing concerns about inflation and rising wage costs, such as a 4% increase in compensation and benefits, could pressure net margins if productivity gains do not offset these expenses.
  
• Strong international intermodal volumes create tough year-over-year comparisons that might challenge volume growth, potentially impacting earnings if other segments do not compensate.

Valuation

• The analysts have a consensus price target of $263.08 for Union Pacific based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $290.0, and the most bearish reporting a price target of just $220.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $27.5 billion, earnings will come to $8.3 billion, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $249.16, the analyst's price target of $263.08 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.