Union Pacific - 9/15/15 Update

Stock of Union Pacific has stabilized near $87.  The current price stood at $87.98 as the markets closed today.  Share prices have changed very little during the past week.  However, the past month marks a 5% decline in share prices, almost certainly due to panic in the Chinese economy, a significant end-point for the goods shipped by Union Pacific.  

With nearly two months passed since third quarter earnings,--one in which EPS, but not revenue, beat analyst estimates--some of the factors that beleaguered top-line numbers still stand.  Foremost, the declining demand for coal continues.  Coal accounts for 18% of Union Pacific's revenue, and declined by 18% year-over-year this past quarter.  The White House aims to cut carbon emissions in the power generation, the primary coal market, by 32% within 15 years.  Management expects coal revenue, as a percent of total revenue, to decline from its previous 18%.  Stronger automotive and general freight has improved the shortfall.  

Expectations for Union Pacific remain positive.  A few major institutions, including Bank of America, Cowen and Company, and Topeka Capital Markets, have upgraded stock of UNP.  Price targets are lower than in the past, but all exceed $100.  In addition, Morningstar recently upgraded Union Pacific debt to a ranking of 'A,' citing reliable cash flows and return on equity.  Accordingly, we remain convicted in this position.