Eyes on CEO shift, derailment risks for Union Pacific earnings
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Railroad earnings season departs from the station on Thursday, with both CSX Corp. (CSX) and Union Pacific (NYSE:UNP) expected to provide updates. As derailment risks linger over the industry and a CEO transition waits in the wings, the latter is sure to attract market attention.
Union Pacific (UNP) is set to report prior to the earnings bell on Thursday as it looks to break a trend of earnings disappointments marked since mid-2022. The consensus EPS and revenue expectations for Q1 stand at $2.57 and $6.03B, respectively.
Analysts expect an adjusted operating ratio of 61.6% for the first quarter. Price increases are also anticipated to help offset sliding volumes, increased labor costs, and service disruptions during the quarter.


Diving into Derailment Concerns


Shares of the Omaha-based rail operator have slid modestly since the start of the year, hit by an increased focus on safety issues following Norfolk Southernâs (NSC) catastrophic derailment in East Palestine, Ohio. Another derailment in Texas on Monday for Union Pacific (UNP) added attention to the issue and bolstered already negative sentiment on the sector amid anticipated regulatory backlash.
âThere is widespread bi-partisan attention and anger centered on the industry following a high-profile derailment, and congressional hearings, forced safety initiatives, and the threat of heightened regulatory oversight do not portend well for long-term cost structures, even if itâs more smoke than fire over time,â Evercore ISI analysts wrote in a recent note to clients.
The derailment issue has also drawn scrutiny to Precision Scheduled Railroading, a hallmark of Union Pacific, especially during the tenure of former COO and Hunter Harrison disciple Jim Vena. Vena is currently rumored to be a top candidate to take over as CEO from the outgoing Lance Fritz. The former executive is a favorite of activist hedge fund Soroban Capital Partners, according to recent statements.
PSR has sparked an increase in the size of trains, in terms of railcars, according to JP Morgan. As such, derailments have the potential to be more catastrophic even as they grow more rare. Per the bankâs analysis, Norfolk Southern (NSC) trains have expanded from about 60 cars in 2013 to over 120 by 2022. Both CSX (CSX) and Union Pacific (UNP) have seen similar dynamics as well. Burlington Northern Santa Fe, perhaps the least PSR-concerned operator in North America, has seen a stable train length. 
Alleviating Labor Overhang


More positively, the company has been successful in reaching labor agreements with major unions, a significant overhang into the close of 2022. Indeed, congress was forced to pass a last-minute bill in order to quash a strike that could have crippled many rail operators, Union Pacific included.
âCongressâ decisive action ensures that we will avoid the impending, devastating economic consequences for workers, families, and communities across the country,â President Biden commented in December. 
As negotiations continued into 2023, agreements with the disgruntled workers have finally been inked. In late March, the company announced a tentative agreement with its largest union. That deal followed the ratification of agreements with 9 separate unions over sick day and leave terms.
âAt Union Pacific, we value our employees and are committed to addressing their concerns by working together with union leaders to find solutions,â Beth Whited, UNPâs executive vice president â Sustainability and Strategy and CHRO, said in late March. "We thank the union leadership for their collaboration and we will continue working with the other unions to address paid sick time solutions.â
Earnings Catalyst Call


In terms of post-earnings reaction, analysts remain divided. 
For example, JP Morgan recently opened a negative catalyst call on the stock ahead of the print. Additionally, Bank of America analyst Ken Hoexter cut his rating to Hold after a disappointing earnings result in January, which was echoed by Deutsche Bank. Both banksâ analysts remain on the sidelines ahead of the Q2 update. Even Barclays, which advised clients to take advantage of overly negative sentiment following the Norfolk Southern derailment, maintains a Hold equivalent.
Despite the spate of downgrades in early 2023, the consensus rating on the stock remains a Buy. Similarly, Seeking Alpha authors remain narrowly bullish on the stock despite three Hold recommendations in April alone.
âWhile the share price could remain subdued for a few more quarters, the company offers great buying opportunities for dividend-focused investors and everyone seeking industrial exposure,â Seeking Alpha contributor Leo Nelissen wrote in a recent bullish report.
The Seeking Alpha Quant team, meanwhile, maintains a Hold rating due to growth, valuation, and a spate of downward EPS revisions as of late. The team moved to Hold in early November 2022.