Union Pacific Corporation’s UNP strong free cash flow generating ability and shareholder-friendly activities bode well. However, elevated fuel costs are worrisome.
Let’s delve deep.
Favorable Factors
Union Pacific's efforts to reward shareholders even in the current uncertain scenario please us. The company hiked dividend twice in 2021.
In May 2022, UNP further upped its quarterly dividend by 10%. It paid dividends worth $3,159 million in 2022.
The railroad operator is also active on the buyback front. In 2022, UNP bought back shares worth $6,282 million.
In first-quarter 2023, UNP returned $1.4 billion to its shareholders through dividends ($795 million) and share repurchases ($575 million). Management anticipates a dividend payout of approximately 45% (of earnings) in 2023. UNP's strong free cash flow generating ability supports its shareholder-friendly activities.
The uptick in overall volumes (up 2% year over year in 2002) as labor woes ease is an added positive. In 2022, volumes (measured in revenue carloads) at the Bulk and Industrial segments increased 2% and 5%, respectively. Volumes at the Premium segment were flat year over year in 2022.
In fourth-quarter 2022, overall volumes were up 1%.
Key Risks
We are concerned about Union Pacific's high-debt levels. Debt/earnings before interest, taxes, depreciation and amortization (EBITDA) ratio (adjusted) at UNP was 2.7 at the end of 2021. It increased to 2.9 at 2022 end.
The ratio was 2.9 at the end of the first quarter of 2023 as well. A high debt/EBITDA ratio often indicates that a firm may be unable to service its debt appropriately.
Increase in fuel costs due to an uptick in oil prices is limiting bottom-line growth. In 2022, expenses on fuel escalated 68%, leading to a 20% increase in operating costs. Due to high costs, operating ratio (operating expenses as a percentage of revenues) deteriorated 270 basis points to 62.1% in first-quarter 2023.
In the March quarter, total operating expenses rose 8% to $3,762 million, with fuel expenses increasing 7%. In 2023, capex is expected to be $2.3 billion. High capex may also hurt the company's free cash flow generating ability.
Zacks Rank & Key Picks
UNP currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks for investors interested in the Zacks Transportation sector are Copa Holdings CPA and Allegiant Travel Company ALGT. While Copa sports a Zacks Rank #1 (Strong Buy), Allegiant carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Copa Holdings is benefiting from an improvement in air-travel demand. In first-quarter 2023, passenger revenues increased 28.5% from first-quarter 2019 levels due to higher yields.
CPA’s focus on its cargo segment is encouraging. In first-quarter 2023, cargo and mail revenues grew 51.8% from first-quarter 2019 levels on higher cargo volumes and yields.
Copa Holdings' fleet modernization and cost-management efforts are commendable. The Zacks Consensus Estimate for current-year earnings has been revised 21.3% upward over the past 60 days.
Allegiant is seeing a steady recovery in domestic and leisure air-travel demand. In first-quarter 2023, operating revenues grew 29.9% on a year-over-year basis. Passenger revenues, accounting for 93.7% of the top line, increased 31.3% on a year-over-year basis.
Allegiant's fleet-modernization efforts are encouraging. The Zacks Consensus Estimate for ALGT's current-year earnings has been revised upward by 47% in the past 60 days.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
