Argus Says Multiples Point To Undervalued Union Pacific, Despite Outperforming Peers For 10 Years

Argus said the recent weakness in the shares of Union Pacific Corporation (NYSE: UNP) offers a buying opportunity.

Underperformance

Union Pacific shares have modestly underperformed the market over the past quarter, rising 2.7 percent versus 3.9 percent gain for the S&P 500. Compared to the peer group, Argus said its multiples are mixed, but generally point to undervaluation.

"We think this comparison is important, as UNP shares have outperformed the peer group over the past 1-, 5- and 10-year periods," analyst John Eade wrote in a note.

Related Link: A Summary Of BMO Capital's Coverage On The Rail Sector

The analyst maintains his Buy rating on Union Pacific, which reported an in-line second-quarter EPS, as the shares are on a recovery mode after slumping in recent quarters due to weak industry fundamentals.

"At current levels, we think that UNP still offers exceptional value," Eade noted.

Looking Ahead

Over the long term, Argus remains positive about North American railroad companies based on strengthening consumer demand for finished goods, low fuel prices and modest growth in automotive/parts shipments, as car sales approach record levels.

However, in the near term, the company has to deal with lower coal shipments amid low natural gas prices.

That said, the analyst highlighted Union Pacific's potential to receive profitable contracts due to its pricing power, as it is the sole major railroad to serve several Midwest and West Coast regions. In addition, the company's industry-low operating ratio helps strengthen the bottom line.

Based on the continued weak outlook for coal shipments, Eade trimmed his 2016 EPS estimate to $5.00 from $5.35, and slashed 2017 estimate to $5.60 from $5.90.

At time of writing, shares of Union Pacific rose 1.78 percent to $92.55. The analyst has a price target of $100 on the stock.

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