Dow Transport component Union Pacific (NYSE:UNP) may be the largest railroad in the U.S., but thanks to a deal with United Parcel Service (NYSE:UPS), it is -- at least temporarily -- shipping goods via trucks.
Union Pacific needed the help because changes to the federal retirement law for railroad workers prompted crew shortages at the railroad company, where workers are taking early retirement in numbers that greatly exceeded company estimates. Even after hiring 2,300 employees last year, the company will hire and train (what a pun!) 4,000 more this year.
Last week, UPS agreed to carry packages that would have normally traveled Union Pacific's rails. Union Pacific will pay the added cost of drivers, gasoline, and other expenses.
Investors might be reminded of the difficulties that plagued Union Pacific after a 1997 merger with Southern Pacific. Today's operations have not slowed to the average train speeds of 12.5 miles per hour that characterized that period, but average speeds have dropped from 25 miles per hour in Q1 2003 to 21.5 miles per hour.
Meanwhile, the company, which had expected earnings to grow 30% to 40% in the first quarter, is making no such forecasts now. Management also has added a court settlement to the list of charges it will take when it reports earnings at the end of this month.
Union Pacific has been slow to work out its problems in the past. Now, besides having to relieve congestion, the on-the-job training of new employees is going to slow day-to-day operations. Given the problems, the mean analyst estimate of $4.56 for 2004 seems iffy, and short-term, the stock should probably be avoided.
Long-term believers, on the other hand, might note that the mean estimate for 2005 is $5.33, which puts the stock at just 11 times forward earnings. If the 2005 estimate bears out, and if the stock is awarded the 15 times trailing earnings multiple enjoyed by competitor Burlington Northern (NYSE:BNI), you'd have an $80 stock by year-end 2005. That's a 40% gain, not counting the 2.1% annual dividend while you wait. (If you're looking for dividends, try a free trial to Mathew Emmert's Motley Fool Income Investor).
That's also a trainload of ifs. Safety-conscious investors looking to ride a railroad through the recovery might consider Burlington or Norfolk Southern (NYSE:NSC) instead. Both have strong margins and neither is reporting staffing problems or operational glitches. As for Union Pacific, it might be best to let the smoke clear before jumping on board.
Interested in discussing the prospects of railroad companies? Try The Motley Fool's Union Pacific and Burlington Northern discussion boards.
Fool contributor W.D. Crotty has been in the Union Pacific dividend reinvestment plan (DRIP) for over 20 years.
