Union Pacific Corporation

Date: June 09, 2024.

Company’s Overview

Union Pacific Corporation (UNP) is a major freight railroad company operating across the western United States. They connect businesses and communities by transporting a wide range of goods, from agricultural products and consumer goods to industrial materials and energy resources.

Competition

Revenue Segments

The Company’s net sales proportions by segment for the most recent quarterly report are composed by:

The Company’s Comparison of total net revenues by segment from 2019 till 2023:

Related Risks

Union Pacific navigates a challenging landscape. Economic downturns can lead to decreased demand for their freight transportation services. Competition from other railroads necessitates efficient operations and competitive pricing. Government regulations add to operating costs, while fluctuating fuel prices impact profitability. Maintaining positive labor relations is crucial to avoid disruptions, and severe weather events can disrupt operations and cause revenue loss.

Financial Performance

Company’s Revenues

Revenues from 2020 to 2023:

• UNP’s annual revenue for 2023 was $22.571B, a -2.54% decrease from 2022.
• UNP’s annual revenue for 2022 was $23.159B, a 14.4% increase from 2021.
• UNP’s annual revenue for 2021 was $20.244B, a 10.92% increase from 2020.
• UNP’s annual revenue for 2020 was $18.251B, a -9.84% decrease from 2019.

The yearly revenue from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s Net Income

Net Income from 2020 to 2023:

• UNP’s annual net income for 2023 was $6.379B, a -8.85% decrease from 2022.
• UNP’s annual net income for 2022 was $6.998B, a 7.28% increase from 2021.
• UNP’s annual net income for 2021 was $6.523B, a 21.95% increase from 2020.
• UNP’s annual net income for 2020 was $5.349B, a -9.63% decrease from 2019.

The yearly net income from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s EPS

EPS from 2020 to 2023:

• UNP’s annual EPS for 2023 was $10.47B, a -6.85% decrease from 2022.
• UNP’s annual EPS for 2022 was $11.24B, a 12.63% increase from 2021.
• UNP’s annual EPS for 2021 was $9.98B, a 26.33% increase from 2020.
• UNP’s annual EPS for 2020 was $7.9B, a -6.06% decrease from 2019.

The yearly EPS from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Company’s Free Cash Flow

Free Cash Flow from 2020 to 2023:

• UNP’s annual free cash flow for 2023 was $4.773B, a -16.88% decrease from 2022.
• UNP’s annual free cash flow for 2022 was $5.742B, a -5.81% decrease from 2021.
• UNP’s annual free cash flow for 2021 was $6.096B, a 8.61% increase from 2020.
• UNP’s annual free cash flow for 2020 was $5.613B, a 8.86% increase from 2019.

The yearly free cash flow from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Shares Outstanding

On April 1, 2022, UNP’s board authorised a share repurchase program of up to 100M of its common shares.

The Company overall has decreased its shares outstanding by almost 40% from 2009.

Financial Strength

Their asset-to-liability ratio of 1.3 falls short of the ideal 1:1 benchmark, indicating a somewhat limited buffer of assets compared to their debts. However, this ratio is mediocre compared to a general standard but might be more acceptable within the railroad industry.

Similarly, the current ratio of 0.93 is on the lower end of the recommended range (ideally above 1). This suggests they might have difficulty meeting all their short-term obligations solely with current assets (like cash and inventory). Again, while not ideal in a general sense, this ratio might be more common within the railroad industry due to the nature of their assets and long-term investments in infrastructure.

The most concerning metric, however, is their net debt of $33.1 billion. This is a significant amount, especially considering the substantial increase (27%) since 2019. With net debt making up a hefty 64% of their total liabilities, their financial flexibility is somewhat constrained. However, it’s important to acknowledge that high debt levels are somewhat common in the capital-intensive railroad industry, where significant investments are needed to maintain and expand infrastructure.

Valuation

Based on the analysis performed, UNP’s price is overvalued. As key metrics, we considered 10% Required Rate of Return (RRR) and 20% margin of safety. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

The company has received a range of ratings from buy to sell. Specifically, there were 15 buy, 3 overweight, 10 hold, 1 underweight and 0 sell ratings. The consensus rating leans toward buy.

Union Pacific presents a mixed bag for investors. While they boast industry-leading profitability with a gross margin of 44.02% (vs 25.58% median) and a net margin of 26.52% (vs 7.6% median), their overall financial performance is lacklustre. Their 10-year CAGR for revenue, net income, and free cash flow are all underwhelming (-0.61%, 2.1%, and 4.15% respectively). However, this mediocrity might be somewhat understandable in the capital-intensive railroad industry.

Financially, the picture is also mixed. Their asset-to-liability ratio (1.3) and current ratio (0.93) are mediocre, indicating limited financial flexibility and potential difficulty meeting short-term obligations. Their significant net debt of $33.1 billion, which makes up 64% of their liabilities and has grown by 27% since 2019, is a cause for concern. However, this high debt level is somewhat common in the railroad industry due to the substantial investments required for infrastructure.

On the positive side, they’ve effectively reduced their share count, leading to a decent EPS CAGR of 6.18%. They also offer a modest dividend with a payout ratio of 66% of free cash flow, and their ROIC of 10.87% exceeds our threshold. Their recent revenue growth of 11% is encouraging.

Union Pacific is a complex case. While industry norms might explain some of their financial weaknesses, their overvalued stock (P/E ratio of 23.54 vs industry median of 14.44) and overall mediocre performance make them a less attractive investment opportunity. The high debt levels also raise concerns about their ability to weather economic downturns. Investors seeking growth or a strong financial profile might find better options elsewhere. However, for those comfortable with a long-term outlook and a company operating within the constraints of the railroad industry, Union Pacific might be a consideration, but with a cautious approach due to the aforementioned drawbacks.

Affiliate

Trade with confidence on Freedom24, your trustworthy and licensed EU broker. Sign up using my referral link (https://freedom24.com/invite_from/2161547) and get a free stock worth up to $700! (Offer for engaged EU residents over 25).

Social

Blog: https://alphacapital99.wordpress.com

Medium: https://medium.com/@petrosmagopoulos

Reddit: @pmagop

X: @pmagopoulos

Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

Any opinions expressed here are my own and do not necessarily reflect the views of any other individual or organisation.

Please use your own judgement and conduct your own research before making any investment decisions.