Given the robust signs of fundamental improvement, we are upgrading our recommendation on Union Pacific (UNP) to Outperform. The company's first-quarter earnings were well ahead of the Zacks Consensus Estimate. Results were also favorable compared with the prior-year quarter.
Earnings benefited primarily from increased operating revenues due to growth in business volumes. However, higher operating expenses, primarily as a result of increased fuel costs and depreciation, marred the earnings growth to a great extent. We expect the top line to benefit from strong pricing with the gradual recovery of the economy.
Cost containment measures, along with initiatives to improve operating efficiency, also augur well. However, labor cost inflation and increasing depreciation expense are expected to drag future profitability.