Christopher Montoya, Senior Vice President at First Financial Trust, anticipates improvements in Union Pacific Corporation (UNP) in 2016.
[Union Pacific] is a company whose stock has not done very well in 2015. As a matter of fact, it’s down in excess of 30%. And the selloff is mainly because they’ve had very difficult year-over-year earnings comparisons. And so they’ve been disappointing the analyst community with their 2015 results.
We think that improves in 2016, as those year-over-year comps get much easier. The stock is very cheap, trading at 12.8 times 2016 earnings estimates, which is below its 10-year historical average of 13 times. The p/e is actually at trough levels, excluding 2008, but the return on equity during that time frame has improved tremendously, enabling this company to be much more profitable with their operations today than what they’ve been in the past.
Montoya says investors have shied away from Union Pacific because of the difficult year-over-year earnings comparison, as well as the belief that manufacturing and shipment of goods is not very strong.
That was validated recently with the ISM Manufacturing number being in contractionary territory for the first time since 2011. A big reason why I think the ISM is in contractionary territory is because inventories have been dropping for five straight months.
Our belief is that inventories can’t drop forever. So at some point in the near future, there has to be an inventory rebuild that replenishes the channel with new products. This will enable Union Pacific to grow revenue.
They have a 2.85% dividend yield with the ability to grow the dividend still further from here. They also still have some additional stock buybacks left in their buyback program.
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