Union Pacific Earnings Should Stay on Track

Union Pacific (UNP 4.99%) will release its quarterly report on Thursday, and investors are hopeful that the company will be able to deliver on the promises that the increase in its share price recently has already made. With the stock trading at all-time highs, Union Pacific earnings need to keep pace in order to avoid a disappointing quarter that could send shares correcting downward sharply.

Fortunately, Union Pacific is benefiting from some favorable conditions for the railroad industry, including high energy prices that warrant more fuel-efficient transportation as well as innovative new uses for the company's railroad network. Let's take an early look at what's been happening with Union Pacific over the past quarter and what we're likely to see in its quarterly report.

Stats on Union Pacific

Source: Yahoo! Finance.

Will Union Pacific earnings keep steaming ahead this quarter?
Analysts have gotten more excited in recent months about Union Pacific's earnings prospects, having boosted their estimates for the June quarter by $0.02 per share and raising their full-year 2013 consensus by $0.13 per share. The stock has followed suit with that optimism, rising more than 13% since early April.

Union Pacific started out the quarter on the right foot, announcing 11% earnings growth in mid-April that beat expectations. The company overcame a slight decline in shipping volume by raising its overall prices, and even though coal shipments remained weak, investors can expect those figures to rise later in the year. As coal companies have shifted their attention toward export markets in light of low U.S. natural-gas prices and reduced domestic demand, railroad rivals CSX (CSX 1.07%) and Norfolk Southern (NSC 1.95%) have sought to defend their powerful geographical advantage by catering to Appalachian coal companies seeking access to export terminals. Union Pacific historically hasn't been as dependent on coal for its overall revenue, but tapping the coal export market also makes sense for it as it seeks a broadly diversified portfolio of revenue sources.

One huge source of growth for Union Pacific has been transporting oil. With pipeline capacities proving insufficient to serve burgeoning new energy areas like the Bakken, Union Pacific has made major investments in filling the gap. Yet oil also presents some threats to Union Pacific's growth, as the recent narrowing of price spreads between domestically produced West Texas Intermediate crude oil and globally available Brent crude will reduce the incentive that refinery companies have to pay transport costs from the Bakken to strategic points along the East Coast.

The wildcard for Union Pacific this year could come from agriculture. Last year's drought conditions hurt crop shipments, and although this year's weather has included some oddities of its own, any improvement could provide much-needed growth in that part of Union Pacific's revenue.

When Union Pacific reports earnings, watch closely for management's reaction to the narrowing spreads for oil prices. With oil having become an extensive part of the railroad's overall strategy, backing down in light of changing conditions could disrupt Union Pacific earnings at least temporarily. What's more likely is that the company will stay on course and weather the storm until rising domestic oil production again creates a more significant discount to global oil prices.

Click here to add Union Pacific to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.