Portfolio Manager Jim Golan of William Blair & Company says Union Pacific Corporation (NYSE:UNP) is well-positioned to benefit from improving freight volumes in 2017 as well as the growth of the Gulf Coast petrochemical industry.
What makes this stock interesting today is that we expect freight volumes to improve fairly significantly in 2017. They were negatively impacted with the drop in oil prices back in late 2014 and 2015 because part of their traffic is hauling crude by rail and then also hauling sand, which is used for the production of shale oil.
When the price of oil fell, that really hit their business hard, and they were also negatively impacted by the coal industry, primarily because of warmer winters and the reduced demand for coal, along with some of the regulations that impacted the coal industry. It’s our expectation that coal volumes will start to pick up, particularly during February and onward. Union Pacific should have very easy comps going forward.
We are also going to see some major improvement on the energy side this year, so that should help volumes. The company will also benefit if industrial activity in the United States picks up, which has been at low levels for many years. All these factors should help Union Pacific’s volumes and earnings over the course of 2017 and 2018.
But what’s really interesting we think — on a longer-term basis — is that they are going to be a major beneficiary of the growth of the Gulf Coast petrochemical industry driven by cheap natural gas that we have here in the U.S. Our petrochemical industry will continue to see pretty significant growth over the next few years, and Union Pacific, as I mentioned earlier, services the Gulf Coast, and so they will be a major beneficiary of that growth.
Full interview available here.
Union Pacific Corporation (UNP) Can Grow Dividend Beyond 2.85%
January 13, 2016