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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Union Pacific

July 30th 2010 Union Pacific
NYSE Symbol: UNP
Industry: Railroads
Price as of 7/30: $74.67

The markets have performed well over the last several weeks thanks to better than expected earnings. One sector that has performed well of late is the transportation stocks. Strong earnings and better than expected guidance from a number of transportation companies are a good sign for the markets and the economy. Whenever the Dow Jones Industrial Average and the Dow Jones Transportation Average outperform, that translates into a bullish indicator. This week, we'll feature Union Pacific, a railroad company that easily beat earnings estimates and raised guidance for the rest of the year.
Union Pacific Corp., the biggest U.S. railroad company, posted a 53% jump in second-quarter profits as freight volumes recovered from the Great Recession. For the quarter ended June 30, Union Pacific reported net income of $711 million, or $1.40 a share, from $465 million, or 92 cents a share, a year ago. Operating revenue for the Omaha, Nebraska based railroad company rose 27% to $4.18 billion from $3.12 billion.
The results came in well above Wall Street's expectations. Analysts polled by FactSet Research had, on average, expected the company to earn $1.19 as share on $4.05 billion in revenue. Management indicated that the second quarter was the first time in six years that all six of its business groups reported volume growth in the same period. Management indciated that while the pace and direction of the economic recovery is uncertain, they are expect and prepared to handle continued volume growth for the rest of the year and beyond. The company currently has about 2,300 furloughed employees, compared with a peak of 5,300 in June of last year. Management expects that within the next 12 months, the furlough will get back down close to zero. That's a good sign.
Union Pacific's stock has performed well over the last year as their business has come back. With the company raising guidance, Union Pacific's stock remains compelling. Currently the stock trades for 14 times this years earnings, 12 times next years estimates. The stock also trades 2 times sales and 2 times book value of $34.66 a share. The analysts love the stock. Dahlman Rose raises their price target to $92 from $88 following earnings. The analyst went on to say the company beat consensus as it achieved a significant operations milestone when it reported an operating ratio of 69.4%, the best recorded in the company's over one hundred year history. He also went on to say that the first quarter should represent the bottom of Unoin Pacific and overall railroad pricing. His earnings estimates are now $5.35 a share and $6.15 for 2011.
Davenport raised their Union Pacific target to $88 from $82 following earnings. Union Pacific's key performance metrics are tracking extremely well, and core pricing gains show no signs of weakness. The analyst stated that Union Pacific still has plenty of operating leverage left to exploit. Union Pacific sports a modest dividend with a yield of 1.8% and goes ex-dividend at the end of August. If the analyst price targets hold up, Union Pacific has another 20% to the upside in the next year not including the dividend.