Railroads Stocks

Union Pacific Corp Valuation – August 2016 $UNP

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today - July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Union Pacific Corporation (UNP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Union Pacific Corporation operates through its principal operating company, Union Pacific Railroad Company. Union Pacific Railroad Company links approximately 20 states in the western two-thirds of the country by rail, providing link in the supply chain. The Company’s business mix includes agricultural products, automotive, chemicals, coal, industrial products and intermodal. The Company operates from West Coast and Gulf Coast ports to eastern gateways, connects with Canada’s rail systems and serves approximately six Mexico gateways. The Company is a Class I railroad operating in the United States. The Company’s network includes approximately 32,080 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways and providing several corridors to Mexican gateways. The Company owns approximately 26,060 miles and operates on the remainder pursuant to trackage rights or leases.

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UNP Chart

UNP data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of UNP – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $77,485,975,076 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.48 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 172.77% Pass
6. Moderate PEmg Ratio PEmg < 20 18.21 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.83 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.48 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 10.05 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

UNP value chart August 2016

EPSmg $5.11
MG Growth Estimate 8.75%
MG Value $132.84
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $74.11
MG Value based on 0% Growth $43.44
Market Implied Growth Rate 4.85%
Current Price $93.06
% of Intrinsic Value 70.06%

Union Pacific Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.23 in 2012 to an estimated $5.11 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.85% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Union Pacific Corporation receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

UNP charts August 2016

Net Current Asset Value (NCAV) -$36.55
Graham Number $51.32
PEmg 18.21
Current Ratio 1.48
PB Ratio 3.83
Current Dividend $2.20
Dividend Yield 2.36%
Number of Consecutive Years of Dividend Growth 10

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $4,566,000,000
Total Current Liabilities $3,095,000,000
Long-Term Debt $14,777,000,000
Total Assets $55,690,000,000
Intangible Assets $0
Total Liabilities $35,268,000,000
Shares Outstanding (Diluted Average) 840,100,000

Earnings Per Share History

Next Fiscal Year Estimate $4.78
Dec2015 $5.49
Dec2014 $5.75
Dec2013 $4.71
Dec2012 $4.14
Dec2011 $3.36
Dec2010 $2.77
Dec2009 $1.88
Dec2008 $2.27
Dec2007 $1.73
Dec2006 $1.48
Dec2005 $0.96
Dec2004 $0.58
Dec2003 $1.51
Dec2002 $1.26
Dec2001 $0.94
Dec2000 $0.84
Dec1999 $0.81
Dec1998 -$0.64
Dec1997 $0.44
Dec1996 $0.20

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.11
Dec2015 $5.08
Dec2014 $4.63
Dec2013 $3.84
Dec2012 $3.23
Dec2011 $2.65
Dec2010 $2.20
Dec2009 $1.84
Dec2008 $1.68
Dec2007 $1.34
Dec2006 $1.15
Dec2005 $1.01
Dec2004 $1.03
Dec2003 $1.19
Dec2002 $0.90
Dec2001 $0.64
Dec2000 $0.44

Recommended Reading:

Other ModernGraham posts about the company

26 Best Stocks For Value Investors This Week – 2/6/16
Union Pacific Corporation Valuation – February 2016 Update $UNP
26 Companies in the Spotlight This Week – 12/13/14
Union Pacific Corporation Annual Valuation – 2014 $UNP
10 Companies in the Spotlight This Week – 12/14/2013

Other ModernGraham posts about related companies

Norfolk Southern Corp Valuation – February 2016 Update $NSC
CSX Corporation Valuation – February 2016 Update $CSX
Union Pacific Corporation Valuation – February 2016 Update $UNP
Norfolk Southern Corporation Analysis – September 2015 Update $NSC
CSX Corporation Valuation – February 2016 Update $CSX
Union Pacific Corporation Valuation – February 2016 Update $UNP
Norfolk Southern Corporation Analysis – September 2015 Update $NSC
Kansas City Southern Analysis – August 2015 Update $KSU
CSX Corporation Annual Valuation – 2014 $CSX
Union Pacific Corporation Annual Valuation – 2014 $UNP

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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