Union Pacific Keeps Chugging

3/10/2014


  Recent Price
$184
  Dividend
$3.64
  Yield
2.0%
  P/E Ratio
19
  Shares (millions)
461
  Long-Term Debt as % of Capital
29%
  52-Week Price Range
$184.83 - $135.75

Union Pacific's ($184; UNP) strong operating momentum fueled outsized stock gains over the past year, yet its valuation looks reasonable given solid growth prospects.

Among the four largest North American railroads, all with stock-market values above $20 billion, Union Pacific generated the strongest growth in earnings per share (up 14%) and revenue (5%) last year. Moreover, cash from operations, up in five straight quarters, rose 11% to $6.82 billion last year. Union Pacific, earning a Quadrix Overall rank of 95, is a Focus List Buy and a Long-Term Buy.

Growth track

Union Pacific relied on higher prices and cost controls to drive 2013 growth. But volumes climbed 2% in the December quarter, the first gain in six quarters, a new piston management says should keep firing in 2014 as U.S. economic growth improves.

Through the first eight weeks of the March quarter, Union Pacific reported 4% higher volumes, the strongest growth of any North American railroad. Agricultural (16% of 2013 freight revenue) and coal (19%) drove growth, the later benefiting from a harsh winter driving up natural-gas prices and eating into coal stockpiles.

Union Pacific's rail network covers the Midwest and West with connections to the Gulf of Mexico. Higher oil supplies from the Gulf Coast lowered prices, causing the company's crude-oil shipments from West Texas, Oklahoma, and the Bakken to decline in the December quarter. Although pricing volatility can cause temporary volume fluctuations, rail traffic in crude oil should continue to grow over the long term, especially as more pipeline companies abandon proposed projects.

Rising analyst estimates expect Union Pacific to grow per-share profits 15% in 2014, ahead of the 11% average for the five railroads in the S&P 1500 Index. Analyst targets for 2014 revenue have also risen in the past four weeks, with the consensus now projecting a 7% gain, topping the peer-group average of 6%.

Operating profit margins, a point of focus for management, have climbed in each of the last nine quarters. Last year, annual operating profit margins reached their highest point since at least 1979.

The company returned $3.5 billion, or nearly 50% of operating cash flow, to investors last year through stock buybacks and dividends. Union Pacific's combined dividend and buyback yield of 4.3% is tops among its peers. The railroad has also generated annualized dividend growth of 25% over the past five years, ranking in the top 10% of our research universe. Repurchases have lowered the share count in 14 consecutive quarters. Free cash flow surged 56% to $1.99 billion in 2013.

Conclusion

Union Pacific shares produced a 34% total return in the past year, nearly double the 18% average for S&P 1500 railroads. Yet the stock seems reasonably priced, earning a Value score of 59. Shares trade at less than 20 times trailing earnings, a 10% premium to their 10-year average but in line with the industry.

An annual report for Union Pacific Corp. is available at 1400 Douglas St., Omaha, NE 68179; (402) 544-5000; www.up.com.

UNION PACIFIC
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '13
2.55
vs.
2.19
7%
168.24
-
149.23
19 - 16
Sep '13
2.48
vs.
2.19
4%
165.18
-
152.04
19 - 17
Jun '13
2.37
vs.
2.10
5%
161.00
-
135.75
19 - 16
Mar '13
2.03
vs.
1.79
3%
143.00
-
127.32
17 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
21.96
9.42
2.96
168.24
-
127.32
18 - 14
2012
20.93
8.27
2.49
129.27
-
104.08
16 - 13
2011
19.56
6.72
1.93
107.89
-
77.73
16 - 12
2010
16.97
5.53
1.31
95.78
-
60.41
17 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
79
59
92
83
94
68

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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