Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Companies Benjamin Graham Would Invest In Today -Â July 2016.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Union Pacific Corporation (UNP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ 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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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
|MG Growth Estimate||8.75%|
|MG Value based on 3% Growth||$74.11|
|MG Value based on 0% Growth||$43.44|
|Market Implied Growth Rate||4.85%|
|% 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
|Net Current Asset Value (NCAV)||-$36.55|
|Number of Consecutive Years of Dividend Growth||10|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
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|
|Shares Outstanding (Diluted Average)||840,100,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$4.78|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.11|
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.
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