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Union Pacific Corporation (NYSE:UNP) is slated to release its third quarter 2011 results on Thursday, October 20, before the opening bell. The current Zacks Consensus Estimate for the third quarter is pegged at $1.81, representing an annualized growth of 15.94%.

With respect to earnings surprises, over the trailing four quarters, Union Pacific has outperformed the Zacks Consensus Estimate in all the quarters except one quarter where the reported EPS missed the Zacks Consensus Estimate of $1.31 by 2 cents. The average earnings surprise was a positive 2.13%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude in three of the last four quarters.

Second-Quarter Performance

On July 21, 2011, Union Pacific reported its second quarter 2011 financial results. Total operating revenue in the second quarter of 2011 was $4,858 million, up 16% year over year and better than the Zacks Consensus Estimate of $4,727 million.

Quarterly net income was a record high $785 million or $1.59 per share compared with $711 million or $1.40 per share in the year-ago quarter. The second quarter EPS of $1.59 beat the Zacks Consensus Estimate by a penny.

Quarterly operating ratio (operating expenses as a percentage of total revenue) was 71.3% versus 69.4% in the year-ago quarter but improved significantly from the previous quarter level of 74.7%, mainly attributable to higher fuel prices (up 44%). Quarterly business volume (measured by total revenue carloads) was 2.247 million, up 3% year over year.

Agreement of Estimate Revisions

In the last 30 days, out of the 23 analysts covering the stock, one analyst increased the EPS estimate for the third quarter of 2011 while nine analysts reduced their estimates. Similarly, for the fourth quarter of fiscal 2011, out of the 22 analysts covering the stock, three analysts increased their EPS estimates but seven analysts moved in the opposite direction.

For fiscal 2011, in the last 30 days, out of the 24 analysts covering the stock, two analysts increased their EPS estimates while 11 analysts decreased their estimates. Likewise, for fiscal 2012, out of the 24 analysts covering the stock, one analyst increased the EPS estimate while nine analysts slashed their EPS estimates.

We believe that the decrease in estimates was mainly due to easing crude oil prices coupled with deteriorating U.S. economic growth.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was 2 cents above the current estimates of $1.31 for the third quarter of 2011 and 3 cents above the current Zacks estimates of $1.77 for the next quarter of 2011. Likewise, for fiscal 2011, the Zacks Consensus Estimate moved up by 5 cents from the current estimate of $6.47, while for fiscal 2012, the Zacks Consensus Estimate was 9 cents above the current estimates of $7.70.

Earning Surprises

In the previous quarter, Union Pacific reported EPS of $1.59, which was just a penny above the Zacks Consensus Estimate. The current Zacks Consensus Estimates for the ongoing quarter contains 0.55% downside potential while for the fourth quarter 2011, it is reflecting a 0.57% downward potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate downside potentials are 0.62% and 0.52%, respectively.

Our Recommendation

Sluggish U.S. economic growth coupled with stiff competition from other freight railroad operators in the U.S. such as KansasCity Southern (NYSE:KSU), CSX Corp. (NYSE:CSX), and Norfolk Southern Corp. (NYSE:NSC) may hurt profitability going forward. However, compelling fundamentals coupled with renewal of legacy contracts at higher prices by the end of 2011 may act as positive catalysts for the stock going forward.

We, thus, maintain our long-term Neutral recommendation for Union Pacific Corporation. Currently, Union Pacific Corporation has a Zacks#3 Rank, implying a short-term Hold rating on the stock.