UNP Stock Outruns Inflation Toward Buy Point

Union Pacific (UNP) is Thursday’s IBD Stock Of The Day as the railroad operator rides efficiency gains and contract wins to outpace inflation. UNP stock, which is just a hair below a buy point, held up much better than the broad stock market on Thursday amid growing expectations that Russia will invade Ukraine.

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On Union Pacific’s Jan. 20 Q4 earnings call, the company highlighted why it may be a solid bet in the current inflationary growth environment.

Amid Covid supply-chain issues that bottlenecked ports and halted some auto production, Union Pacific saw 1% less volume in 2021 vs. 2019. Meanwhile, operating-efficiency gains helped fuel a 16% increase in operating income.

Union Pacific’s operating ratio, expenses as a share of revenue, eased to 57.2% in 2021, the fifth straight yearly improvement. The company expects it to fall further, to 55.5%, in 2022.

PSR: Rail Profit and Efficiency vs. Labor Unions

Union Pacific attributes much of its progress to precision scheduled railroading. PSR management minimizes dwell time — the time customer carloads wait for an available to train to get moving — while extending train length. Union Pacific’s average train length increased 2% to 9,300 feet in 2021.

Fewer, longer trains means more railcars can run on a given line at any one time. Trains haul more goods and schedules are more predictable. Most important, longer trains require fewer employees, which is why labor unions are lobbying Congress in an attempt to discourage the spread of PSR strategies.

Still, as supply-chain constraints ease through 2022, Union Pacific stands to benefit from a recovery. The company’s auto volume was down 10% from a year ago in Q4. That recovery should add to gains from client wins. Trucking firm Knight-Swift Transportation Holdings (KNX) shifted its intermodal business — deliveries requiring both truck and rail — to Union Pacific at the start of the year.

Coal should provide another tailwind, with two recent client wins and elevated demand amid higher natural gas prices.

Management’s early take-away from contract negotiations: “With a strong overall demand environment and our disciplined pricing approach, we expect to yield pricing dollars in excess of inflation dollars,” said CFO Jennifer Hamann.

UNP Stock

UNP stock slipped 0.7% to 251.92 in Thursday afternoon stock market action. That leaves UNP stock just shy of a 256.21 buy point from a six-week flat base, according to a MarketSmith analysis.

UNP stock’s relative strength line, the blue line in the chart provided that tracks its progress vs. the S&P 500, is hitting a multiyear high. That’s an encouraging sign of market leadership, especially when it happens before a stock breaks out.

Keep in mind, the Nasdaq Composite is down more than 11% year-to-date, and the stock market’s status reads “uptrend under pressure.” That means even breakouts by leading stocks should be handled very cautiously. One way to do that is by studying up on options buying…