It’s time to take another look at Union Pacific (NYSE:UNP). America’s largest stock listed railroad company is almost positive for the year while I am writing this. Unfortunately, fundamentals are deteriorating, putting the stock under tremendous pressure. In this article, I will show you some of the company’s fundamentals, earnings expectations, and tell you why I believe that this stock is a good buy at lower prices. So, bear with me!

Source: Union Pacific

2020 Is Insane

Let’s start with the graph I normally show at the end of my articles. Union Pacific has been on one hell of a ride, falling from more than $180 in February to almost $100 during the peak of the COVID-19 fears. Since then, the stock has gained roughly 60% to $165, which is roughly 3% down since the start of the year.

I have never been known to be a bear, and I am not about to change that. However, it is important to acknowledge what it means when this stock is down less than 5% while it seems that the economy is imploding. To show you the market’s expectations and stock price developments, I made the graph below. Before I go into details, let me make a few things clear. First of all, the largest pain inflicted on the economy was caused by the shelter in place orders that started in March. Nobody on earth doubts that the economy will implode once planes stop flying, stores are forced to close, and you aren’t allowed to meet your family anymore. Now, also nobody is surprised that things quickly recover once the economy fully reopens. The third quarter will be substantially stronger than the second – simply because of government measures.

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What we are facing now is the million-dollar question: how fast will economic growth recover?

The graph below shows the year-on-year performance of the S&P 500 (green line) and the ISM manufacturing index. Most of my readers know that I never show GDP graphs as I only care about forward-looking data. In this case, the ISM manufacturing index, based on a forward-looking survey, is down and just barely above 40. I expect this is going to improve to at least 45 as easing lockdown measures will show that pent-up demand is able to somewhat support demand.

However, if the ISM index (economy) is not going to quickly show a V-shaped recovery, we are looking at a somewhat overvalued stock market after the recent rally pretty much erased all losses.

Union Pacific Is Fragile

As I already discussed Union Pacific’s Q1 results in my previous article, I am not going to do that again. What I will do is showing you the updated weekly shipments graph, which is a tremendous indicator of economic growth, and obviously, the company’s own sales. As you can see, the economy was struggling since the economic growth peak of 2019. Since the start of 2019, shipment growth started to contract. In the first weeks of 2020, momentum returned as I had expected growth acceleration. Unfortunately, while I was able to get the growth bottom right, I did not expect the COVID-19 situation to get out of control so fast. As you can see, the lockdown has caused shipments to decline by roughly 25%, with auto shipments down 90%.

Source: Author’s Spreadsheets (Raw data: Union Pacific)

While major production plants are back to work, shipments are still slow. Right now, the 4-week average is at -21% (week 23). This is mainly driven by weak carloads as intermodal is continuing to rise. That said, second-quarter sales are expected to come in at $4.36 billion, according to consensus expectations. This would be down significantly from $5.60 billion in Q2 of 2019. So far, sales are expected to fall by roughly 21%. Earnings per share are expected to fall by 43% to $1.55. The good news is that analysts are expecting the quarter to be absolutely terrible, and it does seem like their estimates are matching the current situation quite well. What we are currently seeing is a situation, unlike the first quarter. In the first quarter, the company managed to show 11% earnings per share growth, thanks to an operating ratio decline of 4.6 points (higher operating efficiency). We are now in a situation where operating leverage won’t make a significant impact anymore.

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That said, right now, expectations are that fourth-quarter earnings per share reach $2.04, or $0.02 higher than the prior-year quarter result.

Source: Estimize

This is not uncommon as a lot of analysts are expecting a rapid recovery towards the end of the year. However, without trying to spoil the party, it is also the reason stocks have recovered this much and why I am not chasing the price.

Game Plan & Advice

Some say not investing is riskier than not investing. While I completely agree that Union Pacific is not a gambling stock, I am still not chasing the chart. Right now, I do own cyclical exposure and do not need to buy to get exposure (upside risk). I expect the market to show some weakness in the 2-3 months ahead and aim to buy Union Pacific between $140 and $150 for a long-term investment. This would imply a dividend yield of roughly 2.6%.

However, if you think I’m dead wrong on the economy (fine with me), and you want a good industrial stock to buy right now, I am the last person to tell you that Union Pacific is a bad stock. The company is an excellent tool to track the economy with a long history of phenomenal shareholder value creation. I have little doubt the stock will trade at a significantly higher price in, let’s say, 5 to 10 years. The only thing I try to do here is to align my purchases with my economic view to avoid chasing the chart. The risk is not buying at all. However, as I do have exposure, that is a risk I am willing to take for now.

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Stay tuned!

Thank you very much for reading my article. Feel free to click on the “Like” button and don’t forget to share your opinion in the comment section down below! My long-term investments are stated in my Seeking Alpha biography.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.