After 30% Drop In A Month, Can Union Pacific Recover?

Trefis Team
Great Speculations

Going by trends seen during the 2008 crisis, Union Pacific could potentially outperform the broader market, when the current crisis is over. We compare the performance of Union Pacific vis-à-vis the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: Union Pacific Compared with S&P 500So far, Union Pacific stock has underperformed the broader markets in the recent coronavirus and oil price war related market crash. The stock has declined 28% since early February, as compared to a 22% fall for the S&P 500 (through March 17). Union Pacific stock was doing well before the outbreak of coronavirus, and it was up over 30% in 2019, led by higher margins, as the company focused on reducing its operating ratio. For perspective, Union Pacific was able to bring down its operating ratio from 63.7% in 2016 to 60.6% in 2019.

As we look forward, 2020 could be rough for Union Pacific. This can be attributed to fears of recession in the global economy, and the impact of the current crisis on the company’s business. Exports are expected to take a hit, and the consumer demand in the current environment is expected to be low, resulting in lower shipments. More importantly, the oil price war will likely result in lower oil production in the U.S., thus also impacting its transportation. Furthermore, natural gas prices have seen over a 15% decline so far this year, which will result in lower demand for coal, thus impacting the coal shipments for railroad companies, including Union Pacific. Moreover, in the time of crisis, stocks that are highly leveraged typically don’t fare very well. If we look at railroad companies, Union Pacific’s cash-to-debt ratio stood at 0.12 in 2019. This compares with 0.33 for Norfolk Southern and 0.18 for CSX. These ratios indicate that Union Pacific is more leveraged when compared to CSX and Norfolk Southern. While these factors explain Union Pacific’s underperformance over the past few weeks, in this analysis, we take a look at how the company’s stock reacted to the economic crisis of 2008 and compare its performance with the S&P 500.

  • On Thursday, March 12, the stock markets saw their biggest sell off since 1987’s Black Monday. While the markets saw a sharp recovery on Friday, March 13, it again saw a sharp decline of around 13% on Monday March 16, marking one of the biggest declines ever for the U.S. markets. Markets recovered around 6% on Tuesday, March 17, on expectations for massive federal stimulus to address the ongoing economic crisis.
  • There are two distinct trends driving the sell-off. Firstly, the increasing number of Coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 30% after Saudi Arabia increased production.
  • Union Pacific stock fell 18% over the last 7 trading sessions, (between March 9, and March 17), and 28% since early February, considering the impact that the outbreak and a broader economic slowdown could have on the company’s business.
  • Going by the trends seen during the 2008 economic slowdown, it’s likely that UNP stock could see strong recovery, and it will likely outperform the broader markets, when the crisis winds down.

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