Union Pacific Has Further To Climb

9/22/2014


  Recent Price
$110
  Dividend
$2.00
  Yield
1.8%
  P/E Ratio
21
  Shares (millions)
905
  Long-Term Debt as % of Capital
33%
  52-Week Price Range
$110.25 - $74.61

Union Pacific ($110; UNP) shares have chugged 30% higher this year, versus 8% for the S&P 500 Index. That rally has driven the stock's Value score down to 41 from 64 at the end of 2013. At 21 times trailing earnings, the shares trade 24% above their five-year average but in line with the median for S&P 1500 Index railroad stocks.

The story of David and Goliath plays out repeatedly in the investing world, where a pebble of bad news can topple stocks with giant P/E ratios. We do not see Union Pacific falling victim to that scenario.

The railroad enjoys outstanding operating momentum and a favorable outlook. Its growth is also backed by strong demand in the broader railroad industry, the arteries through which flows the revived U.S. economy. Union Pacific, yielding 1.8%, is a Focus List Buy and a Long-Term Buy.

Don't bail on rail tale

Union Pacific has churned out 18 straight quarters of double-digit growth in per-share profits. Confirming the sturdiness of that growth, cash from operations has risen in 15 of those quarters.

Last year the railroad posted its widest operating profit margins since at least 1979. Pricing gains helped Union Pacific expand operating margins an additional two percentage points in the first half of 2014. Return on equity has risen in 16 straight quarters and currently stands at nearly double the recession low.

Just 40% of Union Pacific's business is under contracts lasting more than a year, significantly lower than most other railroads, giving management more flexibility to push through price hikes while demand for freight hauling remains strong.

The current railroad environment seems capable of supporting higher prices. In July and August, total U.S. rail traffic rose about 5%, consistent with growth for the first half of the year. Carloads for grain (3% of total traffic), metals (5%), and nonmetallic minerals (7%) have posted double-digit growth in July and August, making up for the 3% decline in coal (20%). Petroleum carloads are up 22%, though they account for just 3% of total U.S. traffic.

Union Pacific's business is spread out fairly evenly, minimizing exposure to a specific product group. Intermodal and industrial products each accounted for 20% of freight revenue in the first half of 2014, followed by coal (18%), agricultural (17%), chemicals (16%), and automotive (9%).

Preparing for growth

Management is gearing up for higher volumes, building its work force and bringing new locomotives online. September-quarter consensus estimates have advanced over the past 90 days, with per-share profits currently projected to rise 20% on revenue growth of 9%. Union Pacific plans to post results Oct. 23.

Union Pacific will have the opportunity to reprice a large portion of its legacy contracts in 2015, allowing it to benefit further from current price trends. Analyst are revising 2015 profit estimates higher, with the current consensus projecting 14% growth.

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
Jun '14
1.43
vs.
1.18
10%
102.96
-
90.36
21 - 18
Mar '14
1.19
vs.
1.02
7%
95.24
-
82.49
20 - 17
Dec '13
1.28
vs.
1.10
7%
84.12
-
74.61
19 - 16
Sep '13
1.24
vs.
1.10
4%
82.59
-
76.02
19 - 17
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
21.96
4.71
1.48
84.12
-
63.66
18 - 14
2012
20.93
4.14
1.24
64.64
-
52.04
16 - 13
2011
19.56
3.36
0.97
53.94
-
38.87
16 - 12
2010
16.97
2.77
0.66
47.89
-
30.20
17 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
83
41
92
85
94
86

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


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