Company Review: Union Pacific Corporation (UNP)

Company Profile:  Union Pacific Corporation (obtained via Google Finance)

Union Pacific Corporation (UNP) operates primarily as a rail transportation provider through Union Pacific Railroad Company (UPRR or the Railroad), its principal operating company. UPRR is a Class I railroad that operates in the United States. UPC has approximately 32,426 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways and providing several north/south corridors to key Mexican gateways. UPC serves the western two-thirds of the United States and maintains coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada and Mexico. Export and import traffic is moved through Gulf Coast and Pacific Coast ports, and across the Mexican and Canadian borders. The Railroad’s commodity revenue consisted of six commodity groups: agricultural, automotive, chemicals, energy, industrial products and intermodal.

Business and Management Review
1) Is the business simple and understandable?
            Union Pacific is in the transportation business.  Transportation is a simple and understandable business.  The company’s main focus is rail transit and they operate 8,400 locomotives on over 32,400 route miles in 23 states. 

2) Does the business have a consistent operating history?
            In 1848, the Galena and Chicago Union Railroad began operating.  Later, this company would eventually become the Union Pacific Railroad after some mergers.  In 1862, President Lincoln signed into law the Pacific Railroad Act – designating the Union Pacific as one of the two railroads responsible to build the first transcontinental railroad (which was completed in 1869).  Over the years, Union Pacific has dealt with bankruptcy, countless mergers, recessions, depressions, and 33 different U.S. Presidential Administrations.  Throughout its history, it has been a railroad operator without question.  
            From a financial standpoint, UPC has paid a dividend for over 10 years, and has had only one year with a net loss in the last 10 years.

3) Does the business have favorable long term prospects?
            The rail industry will continue to be around until we no longer need to move materials too heavy to fly.  In other words, the rail industry should be around a very, very long time.  Union Pacific should be able to survive any stress that may come its way as it has proven through its survival of multiple issues throughout its history.  The company maintains a strong advantage in its well-recognized brand image and the sheer size of the company. 

4) Is management rational?
            Management appears to be rational in its efforts.  Having reviewed the company, we believe in management’s strive toward operation efficiency, safety, better fuel efficient locomotives and other aspects of the company’s long term plan.  We have found no reason to doubt management’s rationality.

5) Is management candid with its shareholders?
            In the company’s annual reports, the letter to shareholders is one of the more informative letters we have seen.  Details of the corporation’s strategies, issues that came up, and some forward looking statements are included.  In addition, the company has an impressive investor relations site.  While you’re there, check out the history section for the general public.  It has some very interesting reading!

6) Does management resist the institutional imperative?
            We believe the management has always resisted the institutional imperative.  Unfortunately (or maybe fortunately, as it led to some of the laws that govern businesses today and support investors) the history of Union Pacific in the nineteenth century includes tales of bribery and fraud – but we don’t need to worry about today’s management.

Financial and Value Review

Defensive:
1) Size of firm
            At a market cap of over $24 billion, the company passes the requirement of $2 billion.

2) Strong financial condition
            The company’s current ratio is not suitable for the defensive investor.

3) Earnings stability
            The company had a net loss in 1998 so it does not pass this requirement either.

4) Dividend record
            Union Pacific has paid a dividend for over 10 years.

5) Earnings growth
            Earnings per share have not grown suitably in the last 10 years for the defensive investor.

6) Price to earnings analysis
            With a PE ratio (using our Methods) of 24.94, the requirement of under 20 is not met.

7) Price to assets analysis
            Since the PB ratio is 1.67, it makes up for the high PE ratio, and the company passes the final 2 tests.

Overall
Having passed only 4 of the required 8 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Union Pacific is suitable for the defensive investor.

Enterprising:
1) Strong financial condition
            With a poor current ratio, the company fails this test.

2) Earnings stability
            The company has achieved a positive net income for over 5 years.  It passes the test.

3) Dividend record
            The company currently pays a dividend.  Pass.

4) Earnings growth
            Earnings are greater today than they were 5 years ago.

Overall
We find the company to be suitable for the enterprising investor.

Valuation:
Our valuation model finds a fair value to be around $95. 

Opinion:
Since the company is currently trading at $90, we feel it is fairly valued but may be a suitable investment for the enterprising investor.

Neither of us held a position in Union Pacific Corporation at the time of publication.  Also, please read our disclaimer and Our Methods.

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This is the second part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 – Jon – Burlington Northern Santa Fe (BNI)
Tuesday, January 9 – Ben – Union Pacific Corporation (UNP)
Wednesday, January 10 – Jon – Kansas City Southern (KSU)
Thursday, January 11 – Ben – Providence & Worcester Railroad Co (PWX)
Monday, January 15 – Jon – The Greenbriar Companies (GBX)
Tuesday, January 16 – Ben – Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 – Jon – Canadian National Railway (CNI)
Thursday, January 18 – Ben – Norfolk Southern Corporation (NSC)
Monday, January 22 – Ben – Overall Industry Analysis & Introduction of Next Industry


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