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Union Pacific Corporation (NYSE:UNP) reported strong third quarter 2011 financial results with both revenue and earnings per share (EPS) exceeding the Zacks Consensus Estimate.

Third Quarter Highlights

Quarterly net income stood at a historic high of $904 million or $1.85 per share compared with a net income of $778 million or $1.56 per share in the year-ago quarter. Third quarter 2011 EPS of $1.85 easily surpassed the Zacks Consensus Estimate of $1.81.

Total operating revenue in the third quarter of 2011 was $5,101 million, up 16% year over year and bettered the Zacks Consensus Estimate of $4,996 million.

Quarterly operating ratio (operating expenses as a percentage of total revenue) was 69.1%. Although it was worse than the year-ago quarter ratio of 68.2%, it improved significantly from the previous-quarter level of 71.3%. The year-over-year decline is mainly attributable to higher fuel price (up 42%).

Quarterly business volume (measured by total revenue carloads) was 2.341 million, up 1% year over year. Quarterly Consumer Satisfaction Index was 91% compared with 90% in the year-ago quarter.

Agreements of Analysts

Of the 23 analysts covering the stock in the last 7 days, none revised their estimates for the fourth quarter of 2011. Likewise, for the first quarter of 2012, out of the 12 analysts covering the stock, none changed their estimates.

For fiscal 2011 and 2012, out of the 24 analysts covering the stock, none revised their estimates during the last 7 days.

The current Zacks Consensus EPS Estimate for the fourth quarter of 2011 is pegged at $1.79 with the projected annual growth rate of 14.80%. Similarly, for the first quarter of 2012, the current Zacks Consensus EPS Estimate of $1.56 indicates a gain of 21.19% year over year.

Magnitude of Estimate Revisions

For the fourth quarter of 2011 and first quarter of 2012, the Zacks Consensus Estimate remained unchanged at $1.79 and $1.56, respectively, with respect to the current estimate during the last 7 days. Likewise, for fiscal 2011 and 2012, during the last 7 days, the Zacks Consensus Estimate was in line with the current estimate of $6.53 and $7.78, respectively.

Earning Surprises

With respect to earnings surprises, the company has produced an average earnings surprise of 1.68% in the trailing four quarters. The ongoing quarter and first quarter of 2012 reported an upside potential of (essentially a proxy for future earnings surprises) 0.00% and 0.64%, respectively.

However, fiscal 2011 and 2012 holds a downside potential of 0.15% and 0.13%, respectively.
Our Recommendation

Robust financial results coupled with continuous improvement of operating ratio and other important metrics will act as positive catalysts for growth. However, stiff competition from other freight railroad operators in the U.S., such as KansasCitySouthern (NYSE:KSU), CSX Corp. (NYSE:CSX), and Norfolk Southern Corp. (NYSE:NSC), will act as headwinds for the company 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.