Union Pacific Corporation (UNP)

Equity
US
Industrials

RISK

RETURN

Key risk factors

Negligible price volatility

Strong trading liquidity

Strong & resilient to price shocks

Key return factors

Very strong margins and returns

Greatly overvalued vs peers

Decent dividends

Company profileUnion Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, operates in the railroad business in the United States. The company offers transportation services for grain and grain products, fertilizers, food and refrigerated products, and coal and renewables to grain processors, animal feeders, ethanol producers, and other agricultural users; petroleum, and liquid petroleum gases; and construction products, industrial chemicals, plastics, forest products, specialized products, metals and ores, soda ash, and sand, as well as finished automobiles, automotive parts, and merchandise in intermodal containers. As of December 31, 2021, its rail network included 32,452 route miles connecting Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways. The company was founded in 1862 and is headquartered in Omaha, Nebraska.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

22.10

20.70

PEG

7.00

P/B

9.00

6.30

P/S

5.90

5.70

P/FCF

28.10

21.90

EV/EBITDA

15.10

13.70

Based on key historical and expected multiples, the stock is greatly overvalued relative to its peers. In particular, the stock is overpriced on P/E, 'expensive' on EV/EBITDA, and overvalued on P/FCF.

Performance: Mixed

Over the last six months, the stock performance has varied, with an increase following a drop. When measured against its worldwide peers from the same industry (as shown above), the stock has been weaker, underperforming by 4ppts. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Somewhat favourable

The average target price is 259 and suggests 12% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 267.9. This translates into 15% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 194.0. This is equivalent to 16% downside potential in the worst case.

Profitability: Very strong

RoE

Union Pacific Corporation reported a return on equity (RoE) of 42.0% in the last 12 months, down from 47.3% in FY23. The market consensus projects an RoE of 41.4% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 9.5% in the last 12 months, a decrease from 9.6% in FY23. The market analysts predict that RoA will be 8.0% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 10.2%, above the peers. The consensus estimate for FY24 for RoCE is 12.5%, again ahead of the peers.

Net margin

EBITDA margin

Historically, UNP has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 26.5%, a growth from 26.4% in FY23. The company has reported very strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 47.9% in the last 12 months, a decline from 48.2% in FY23.

RoIC / WACC = 2.1(strong value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 2.1 in the past several years. This ratio implies a strong shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

UNP reported revenue of USD 24 094mn in the last 12 months, down 0% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 0% from FY23 to USD 10.49. Market expects EPS to reach USD 11.27894 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while slow revenue growth and a stable cost base have translated into weak EBITDA growth (negative-to-neutral). This all contributed to slow EPS growth (neutral). The FCF trend is falling, a notch worse than EBITDA. On the positive side, revenue and EBITDA dynamics is very stable.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been moderate and on par with its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note robust profitability and solid return on capital, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, poor working capital management, and an unfavourable capital structure.

Volatility: Negligible

In normal market circumstances, UNP is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, UNP is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Very low

UNP boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.