Union Pacific Chugging Along
We are retaining our Hold on Union Pacific Corp. (UNP), as well as our $80 target price. UNP will report third quarter results on October 23. We are maintaining our 2008 diluted EPS estimate at $4.15, near the high end of management's increased $4.00-4.20 range (up from $3.88-4.13 before), and our 2009 EPS estimate at $5.
UNP should benefit from higher rates on contract renewal pricing and improved productivity, which should offset expected volume weakness and higher fuel costs. UNP posted second quarter EPS of $1.02, up 24% year-over-year, and better than consensus of $0.92 and our estimate of $0.91, largely due to higher-than-expected revenue growth.
Revenues advanced 13% as higher rates (revenue per car up 16%) offset a 3% volume decline. UNP recently increased its dividend by 23%, following a 26% in 2007's fourth quarter.
The company repriced 7% of its business in 2007 and has the opportunity to reprice an additional 6% in 2008. Fuel conservation, which saved about 21 million gallons of fuel in 2007 and 19 million gallons in 2008's second quarter, will continue to be a top priority.
The slowing macroeconomic environment in the U.S. is expected to have a negative impact on top-line revenue growth for UNP during 2008. Weakness in the auto and housing sectors and flooding in the Midwest contributed to a 3% decline in volume, as measured by revenue carloads, in 2008's second quarter. Moreover, UNP-estimated 2008 volume is estimated by the company at down 1%.
Varian Semi Still Best in Class
Varian Semiconductor Equipment Associates, Inc.'s (VSEA) June top and bottom-line results met consensus estimates. VSEA has superior technology and remains several product generations ahead of competitors. As Nodes transition to 90 nanometers VSEA remains the strongest solution for ion implementation. Consequently we reiterate our Buy rating of the shares of VSEA and set a price target of $45.
On July 25, 2008 VSEA reported earnings for the third quarter of 2008 ended June 2008. Revenue for the quarter totaled $182.6 million, compared to revenue of $255.3 million last quarter and $288.7 million for the same period a year ago. The management delivered guidance for the second quarter of 2008. VSEA expects revenue to be between $130 and $140 million. Earnings per share are anticipated to be slightly above break even.
During the second quarter, the management announced it had bought back nearly $40 million or 1.2 million shares of our stock. Through the end of the quarter, VSEA has bought back a cumulative total of about 20.1 million shares of outstanding shares from September 30, 2005 at a cost of approximately $653 million.
The Semiconductor Industry Association (SIA) has upheld its previously released annual forecast for 2007-2010, which appears more positive than several leading market research firms. Accordingly, semiconductor sales are expected to grow at a CAGR (compound annual growth rate)'of 7.7% to $321.5 billion in 2010.
Petrobras Priced Attractively
We are keeping our Buy recommendation on Petroleo Brasileiro S.A. or Petrobras (PBR) ADRs. We like Petrobras for its positive production-growth profile and the improving outlook for its downstream business. Moreover, the discovery of the giant Tupi field opens up a new range of possibilities for the company in the long run.
Recently, from the drilling of well known as lara in the northern part of Tupi field, PBR discovered light oil and natural gas, with estimated recoverable volume of 3 to 4 billion barrels of light oil and natural gas. The company's large inventories of development projects are also encouraging. Finally, second quarter 2008 results were better than expected, and the outlook for the following quarters remain quite encouraging, even though lower oil prices exist.
Even without considering some important new discoveries, Petrobras is expected to grow annual volumes by approximately 6% over the next few years. Some months ago Petrobras announced a R$2.1 billion (US$1.1 billion) acquisition of Suzano Petroquimica S.A., an important Brazilian petrochemical group. The company is leading the consolidation process in the Brazilian petrochemical sector.
At current levels, Petrobras ADRs are trading at 9.1x our 2008 earnings estimate, at a premium over the industry mean of 7.6x. PBR is now trading with a premium as a result of its fantastic long-term growth potential. However, the whole industry is now trading with a reasonable discount if compared to the S&P index, due to the recent fall in oil price.
