Baird upgrades Union Pacific's rating due to merger synergy prospects

Investing.com - Baird has upgraded Union Pacific from Neutral to Outperform, stating that investors should take advantage of the stock price pullback to build positions, as the proposed merger with Norfolk Southern is progressing through regulatory approval. The stock has fallen 3% this week.

Baird has raised the target price for Union Pacific from $239 to $311 and set the target for Norfolk Southern at $315, citing potential cost savings and network benefits from the merger of the two rail operators.

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The brokerage said that after the Surface Transportation Board issued an incomplete ruling and Union Pacific plans to resubmit its application before April 30, the regulatory timeline for the deal may have been pushed back to mid-2027.

Although approval may take longer, Baird still believes the merger will ultimately be approved. Discussions around the deal have expanded from rival railroads to a broader group of stakeholders, including lawmakers and industry groups, raising concerns about competition and pricing.

A group of Republican lawmakers led by Dusty Johnson recently wrote to the Surface Transportation Board warning that the deal could weaken competition among railroads and increase freight rates. Meanwhile, the brokerage noted that after the resignation of the Department of Justice antitrust chief, the regulatory environment could shift, which is seen as more favorable for industry consolidation.

Baird said that the five-member Surface Transportation Board currently has two vacancies, including the seat previously held by Marty Oberman. Railroad consultant Richard Kloster has been nominated to replace him, and if confirmed, could help advance the approval process.

The brokerage indicated that Union Pacific management may have underestimated the potential cost savings from the merger. Synergies are expected to exceed the initial estimate of about $1 billion, thanks to lower fixed costs, reduced transfers, and improved network efficiency.

Baird stated that the merged railroad will create a transcontinental network that can shorten transportation times and support freight growth.

Union Pacific’s stock has risen about 13% this year, roughly in line with the industrial sector, as measured by the Industrial Select Sector SPDR Fund, which has gained about 11%.

Baird recommends that, as the merger review progresses, investors gradually increase their holdings over the coming months in anticipation of improved market sentiment.

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