U.S. railroad giant Union Pacific Corp. (UNP) made history by launching its first national advertising campaign in nearly a decade, focused on creating new business opportunities. In the second quarter 2010, Union Pacific witnessed a record operating ratio of 69.4% compared with 77.4% in the prior- year quarter. This is the first time that Union Pacific achieved a sub-70 benchmark.

Union Pacific is also hiring and training rail crew to further improve operating efficiency. During second quarter 2010, the company repurchased nearly 6.5 million shares for a total consideration of approximately $466 million, reflecting management’s confidence in the improving U.S. economy and free cash flow dynamics.

From fiscal 2005 to 2009, Union Pacific spent $14.3 billion in capital expenditure and for 2010, it expects to invest an additional $2.6 billion to enhance capacity and add more network to its 32,100 miles of track.

Union Pacific caters to a large clientele offering a host of services such as freight transportation for agricultural products, automotive products, chemicals, energy products, industrial products and intermodal containers. Hence, it focuses on customer satisfaction, productivity, efficiency and safety.

However, Union Pacific is also exposed to certain risks related to the rail industry, such as fuel prices, coal regulation and general economic trends. Moreover, it also faces currency fluctuation risks as roughly 30% of its total revenue is import or export based.

An improving U.S. economy, surge in automotive shipments and a sharp rebound in many of the company’s end -markets are expected to fuel its future growth. As the U.S. economy continues to grow gradually, demand for carriage also becomes robust and the momentum is expected to be sustained in the long run.

According to our view, Union Pacific is better insulated against economic uncertainty as approximately 37.0% of its revenues are tied to less cyclical freight like agriculture and coal.

Union Pacific faces stiff competition from Burlington Northern Santa Fe Corporation, Canadian National Railway Company (CNI) and CSX Corp. (CSX).

We maintain our long-term Outperform recommendation for Union Pacific. Currently, it is a short-term Zacks # 1 Rank (Strong Buy) stock.

 
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