Analysts tracking railroad stocks are hopping onboard the "Buy" train for Union Pacific Corp. (UNP) .
Shares of the Omaha, Nebraska-based railroad holding company have surged in Tuesday's trading, up around 10% amid upgrades to "Buy" from Scotiabank, Cowen & Co., RBC Capital Markets and Seaport Global.
The upgrades from the major firms follow the company's hire of new COO Jim Vena, an expert in the Precision Railroading System (PRS) that underwrites the company's Unified Plan 2020 that aims to streamline operations for the railroad giant.
"This marks yet another milestone in the PSR chronicles at UNP, and puts the company one step closer to full network implementation by mid-2019 - which is now clearly visible," Oppenheimer analyst Allison Landry commented. "As such, we think execution risk is diminished."
Landry likewise set a "Buy" rating for the stock, highlighting the bullish outlook for the company with her $166 price target and a "Best Idea" tag.
Stephens analyst Justin Long likewise highlighted the stock as one of his "best ideas" on the basis of its apparently more achievable 2020 aspirations.
Profiting Off Precision
The key to the company's efforts is the Precision Railroading System, which has littered the bullish advisory letters of analysts and is a major driver of the company's Unified 2020 Plan.
The management system, pioneered by the late E. Hunter Harrison in his tenure at both CSX Corp. (CSX) and the Canadian National Railroad (CNI) , focuses on minimizing railcar usage while maximizing freight delivery.
"The prevailing view in the rail industry is that more locomotives, more cars and more crews allow for the movement of more volume. Precision railroading challenges this view," a white paper on the system authored by Canadian Pacific Railway (CP) explains. "Because track and yard capacity is finite, adding more equipment creates congestion and slows down the system. While it may sound counterintuitive, reducing fleet size actually enables a railroad to move more volume, by running fewer and heavier trains, faster and on schedule, as assets can be utilized far more productively and can yield significant savings."
The system is credited with reducing operating ratio significantly at each of the companies that Harrison pursued the much-publicized strategy.
Harrison's status as the progenitor of the system is of particular interest given Vena is seen as Harrison's protégé after serving under Harrison at Canadian National Railroad at the tail-end of his 40-year career there.
"We see upside to the company's 60% operating ratio target by 2020," Landry wrote. "The news that former CN vet and highly experienced Precision Scheduled Railroader Jim Vena was hired as the new COO comes as a welcomed distraction from the macro and our channel checks suggest that Mr. Vena who has nearly two decades of PSR experience at CN, including more than 10 years under Hunter Harrison, is a capable operator."
Pump the Brakes?
The run-up for UNP stock does bring some questions, however, as Vena's appointment is as COO, not CEO, and the macro challenges that exist for the largely cyclical industry raise some concerns about the company's overall growth potential.
"This is a railroad after all," Jim Cramer commented on CNBC on Tuesday morning. "It's not a biotech."
Additionally, concerns remain over the customer service provided by a streamlined business model, especially amidst the large-scale changes necessary to bring the operating ratio down in the fashion the company proposes.
Nonetheless, analysts covering the stock largely see long-term upside for the company in transition, as bringing the prince of PRS aboard is seen as the fast track to share price growth.
The upgrades and price target raises from RBC, Cowen, and Seaport leave the FactSet consensus at a consensus "Buy" rating with an $165.24 price target, offering yet more potential upside from the 10% jump on Tuesday.