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Jump aboard Union Pacific

Union Pacific's diversification has been rewarded with a forecast-beating first quarter and we reiterate our buy tip
April 19, 2013

Dirt cheap shale gas has blown a hole in demand for more expensive coal and cast a cloud over the US transport sector. That's affected Union Pacific (UNP), North America's largest railroad and economic bellwether, which generates about a fifth of its income from the black stuff. Freight revenues from coal fell 6 per cent in the first quarter and grain revenues were weak, too - although Union has been smart and diversified into other sectors. That explains why a 3 per cent increase in revenue to $5.03bn (£3.3bn), and 13 per cent jump in earnings to a record $2.03 per share, both smashed Wall Street estimates.

IC TIP: Buy at $142.86

Much of that is to do with shale gas and oil. Union transports the special sand and drill pipes to the explorers, takes the oil and gas away to the refining hubs, then delivers the finished product to market. Rising demand for new cars and trucks, and supplying the US housing market recovery, is also lucrative. In fact, revenue from chemicals leapt 14 per cent in the first quarter and automotive only slightly less.