A new conductor has helped steer Union Pacific Corp. (UNP) stock higher on Tuesday.
Shares of the Omaha, Nebraska-based railroad holding company have leapt nearly 8% higher in premarket trading on news that industry veteran Jim Vena will come out of retirement to steward the company's "Unified 2020" plan as COO.
"Unified Plan 2020 combines precision scheduled railroading principles with our own UP Way tools and best practices," UNP CEO Lance Fritz said. "We have been making excellent strides rolling out Unified Plan 2020, and Jim's vast knowledge of the precision scheduled railroading model brings significant experience and expertise that will enhance the work already underway."
The ambitious effort is aimed at achieving a 60 percent operating ratio goal for the company by 2020, on the way to a 55 percent operating ratio in the long term to meet investor and customer expectations.
The potential for such an increase in productivity could make UNP's current forward price-to-earnings ratio of 15.5 an attractive valuation for investors.
"We believe that Jim Vena could be instrumental in helping UNP push forward with its Unified Plan 2020, which aims principally to improve operational efficiency through the implementation of Precision Scheduled Railroad (PSR)," BMO Capital Markets analyst Fadi Chamoun commented. "Operational improvements could materialize faster under Vena's leadership as he brings to bear his extensive experience in PSR."
He added that, given Vena's history of value creation at the Canadian National Railway (CNI) , the company could enjoy $2.3 billion in added value as it executes its plan.
Chamoun issued an "Outperform" rating and a $172 price target, helped in part by Vena's steady hand on the wheel.
To be sure, the train toward the 2020 targets will be an uphill climb as a tougher macro environment and operational issues confront the company amid its ambitious aspirations. The issues have already motivated hundreds of layoffs in recent months and bring into question the progress of its 2020 effort.
"While Jim Vena has a strong track record and solid reputation, UNP's management (new and old) still needs to show evidence that its Unified 2020 plan is gaining traction -- in an environment of slowing volume growth (particularly frac sand, where UNP has disproportionate exposure)," Deutsche Bank analyst Amit Mehrotra wrote on Tuesday. "Today's announcement is a significant step in the right direction, and we'd expect shares to be up nicely, but further gains won't likely come until there is tangible evidence of progress in the numbers."
Still, Mehrotra retained his "Buy" rating and a $175 price target for the stock, an outlook he upgraded to in the fourth quarter of 2018.
He noted that the company's efforts to improve profitability appear largely achievable and that macro concerns could be offset by contrasting commodity pressures and still strong, though diminishing, truckload demand.
"Carload trends have improved since early 4Q '18 and we believe the industrial economy remains accommodative which, coupled with continued strength in intermodal and chemicals (crude by rail), should help offset weakness in other commodities such as grain, autos and coal."
