Union Pacific Earnings Preview: Look For The Upward Trend To Continue

Railroad transportation giant Union Pacific (UNP) is set to release earnings on Thursday, April 18, before the market opens. While many companies are expected to see earnings decline on a year-over-year basis for the first quarter, analysts expect Union Pacific's earnings to grow by 13.1%.

The company reported earnings of $1.68 per share for the first quarter of 2018, and the consensus estimate for this year is EPS of $1.90. Revenue is expected to come in at $5.55 billion for the first quarter.

Over the last three years, earnings have grown at an average rate of 14% per year, and they were up 39% in the fourth quarter. Sales have only grown at an annual rate of 3% per year over the last three years, and they were up 6% in the fourth quarter. The estimate for the first quarter is for growth of 1.3%.

While the earnings growth has been impressive and steady, the management efficiency measurements are just as impressive. The return on equity is at 26.4%, and the return on assets is at 9.1%. The profit margin is at 33.9%, and the operating margin is at 37.5%.

The overall fundamentals are well above average, with the sales growth being the only area that is below average. The fundamental ratings from Investor's Business Daily show an EPS rating of 83 and an SMR rating of an A. The EPS rating measures the company's earnings growth over the most recent quarter and the last three years and then compares it to other companies. The 83 rating means the earnings growth is better than 83% of all companies. The SMR rating measures the sales growth, profit margin, and return on equity, and an A is the highest rating a company can get. These ratings play a major role in the stocks I target for the Hedged Alpha Strategy.

Constant and Steady Price Performance over the Last Three Years

Looking at the weekly chart, we see that Union Pacific has been trending higher since early 2016. The stock is up over 150% from the low back in 2016, and it is up approximately 30% over the past year. That compares very favorably to the 9.3% the S&P has gained in the past year.

UNP SA.png

What is really interesting about the chart is the trend channel that has formed. I took a little bit different approach to drawing this trend channel and added a third line. The middle line is a regression line, and the outer rails are approximately equidistant from the regression line.

When I first looked at the chart, I thought the stock was too close to the upper rail, but when I added the regression line, it showed how close the stock is to it. The trend has been nice and tight with only two moves outside of the channel in the last three years - one on the top side, and one on the low side.

The weekly stochastic readings are in overbought territory, and that is a bit of a concern, but not a huge one. If we look at the past few years, the stochastic readings have remained in overbought territory for extended periods. The 10-week RSI isn't in overbought territory, and that is a good thing. When the RSI has reached overbought territory, the stock has been a little more vulnerable to pullbacks.

The Sentiment Toward Union Pacific is Neutral, But There is a Slight Skew to the Bearish Side

Turning our attention to the sentiment toward Union Pacific, we see a stock that isn't overly-loved or overly-hated. The short interest ratio is currently at 2.65, which is average. The short interest did drop significantly from the mid-March reading to the end of March reading. There were 12 million shares sold short on March 15, and by March 29, that figure had dropped to 9.44 million.

There are 27 analysts following the stock currently, and 17 rank the stock as a "buy". There are eight "hold" ratings and two "sell" ratings. I speak often about the average range for buy percentages being between 65% and 75%. For Union Pacific, that buy percentage is at 63%, so it is a little below average for a company with fundamentals so solid.

UNP Analaysts Ratings.jpg

The put/call ratio is currently at 1.12, with 94,541 puts open at this time and 84,428 calls open. The ratio is slightly skewed toward the pessimistic side, and that is a good thing from a contrarian perspective. One thing that really jumped out at me about the option activity was what I call the relative open interest. The total open interest represents just over five days of average daily trading volume, and that is one of the highest relative open interest levels I have seen recently.

Because of the short-term nature of options, they tend to play a little greater role in the sentiment around earnings reports.

Looking at the sentiment picture as a whole, we have a short interest ratio that is average and has dropped recently, but the analysts' ratings and the put/call ratio are slightly skewed to the pessimistic side.

My Overall Take on Union Pacific

I am bullish on Union Pacific for the long term. The fundamentals are really good, the stock is in a clear upward trend, and the sentiment isn't overly optimistic. The stock is up considerably over the last few months, and that has put the weekly stochastics in overbought territory, but that is a minor concern.

Over the last 10 earnings reports, Union Pacific has beaten estimates on eight occasions and missed on two occasions. The stock has been higher a month after the earnings report almost every single time, even when the company has missed estimates. The two exceptions were in July '17 and January '18. And, even on those occasions, the stock wasn't down a great deal.

What is interesting about Union Pacific is that it doesn't tend to gap a great deal after earnings. It has on a few occasions, but even when it has gapped, it has only been by a few percentage points.

For selfish reasons, I would love to see Union Pacific pull back a little and move closer to the lower rail of the channel and move out of overbought territory. This would give me a chance to get the stock in the Hedged Alpha Strategy portfolio. But given the history of moving higher after earnings, I am not counting on getting that chance in the next few weeks. I don't think the stock is a great trading stock, but I do think it is a good long-term investment, and I am waiting for an entry point. I definitely wouldn't look to short the stock anytime soon.

If you would like to learn more about protecting and growing your portfolio in all market environments, please consider joining The Hedged Alpha Strategy.

One new intermediate to long-term stock or ETF recommendation per week

One or two option recommendations per month

Bullish and bearish recommendations to help you weather different market conditions

A weekly update with my views on the market, events to keep an eye on, and updates on active recommendations

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.