Thursday, April 8, 2010
Union Pacific Corp (UNP)
Sector: Services
Industry: Railroads
Market Cap: $38B
Dividend Yield: 1.50%
Consensus EPS current year: $4.34
Consensus EPS next Year: $5.16.
Company Description:
Union Pacific Corporation provides rail transportation services in North America. It has approximately 32,094 route miles linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways, and provides several corridors to Mexican gateways. The company offers freight transportation services for agricultural products, including whole grains and related commodities, food, and beverage products; automotive products; chemicals, such as industrial chemicals, plastics, and liquid petroleum products; energy products; industrial products; and intermodal containers. Union Pacific Corporation was founded in 1862 and is based in Omaha, Nebraska.
Thesis:
Shipping by rail is a cost-effective and efficient way to ship. Compared with trucking, shipping by rail is less expensive for long distances and is 3 times more fuel-efficient per ton shipped. Union Pacific and Norfolk Southern are essentially an oligopoly and have recently benefitted from improved pricing power. UNP's rates are likely to continue to increase, particularly since the company will renew approximately one quarter of its contracts during the next five years. UNP hauls less cyclical commodities such as coal, agricultural products and containers carrying goods from Asia. UNP’s western tracks afford access to attractive defensive segments as the coal that UNP hauls from the Powder River Basin is substantially less expensive than coal from other regions.
UNP has likely established a bottom in volumes. With pricing increasing, yield comparisons are likely to become favorable and lead to EPS upside in 2H10. UNP has a high degree of operating leverage. Between 2005 and 2008, UNP increased revenue from $13.6 billion to $18.0 billion, improved its operating ratio from 86.8% to 77.3%, and increased net income from $908 million to $2.34 billion. UNP should also benefit from its exposure to Mexico as it has more points of entry to Mexico than any other rail. UNP is currently trading at 14.6x forward earnings, in line with its competitors.
Catalysts:
• Upside earnings potential in re-pricing older contracts.
• Improving operating ratio via improving car utilization.
| 2009 Key Statistics | |
| Revenues | $14.1B |
| EBIT | $3.39B |
| Net income | $1.89B |
| Operating margin | 24.00% |
UNP Financials | |||
| 2007 | 2008 | 2009 | |
| Income Statement | |||
| Revenue | 16,283 | 17,970 | 14,143 |
| Operating Income | 3,375 | 4,075 | 3,392 |
| Net Income | 1,855 | 2,338 | 1,898 |
| Basic EPS | 3.49 | 4.58 | 3.77 |
| Avg. Diluted Shares Outstanding | 537 | 515 | 506 |
| Balance Sheet | |||
| Current Assets | 2,594 | 2,813 | 3,680 |
| Non Current Assets | 35,439 | 36,909 | 38,730 |
| Total Assets | 38,033 | 39,722 | 42,410 |
| Current Liabilities | 3,041 | 2,880 | 2,682 |
| Total Liabilities | 22,448 | 24,275 | 25,469 |
| Shareholder Equity | 15,585 | 15,447 | 16,941 |
| Cash Flow | |||
| Cash From Operations | 3,277 | 4,070 | 3,234 |
| Capital Expenditures | -2,496 | -2,780 | -100 |
| Free Cash Flow | 781 | 1,290 | 3,134 |
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Cummins Inc. (CMI)
Sector: Industrial Goods
Industry: Diversified Machinery
Market Cap: $12.9B
Dividend Yield: 1.15%
Consensus EPS current year: $2.41
Consensus EPS next Year: $3.86
Estimated 5 year Growth Rates: 12%
Company Description:
Cummins is a global power leader that designs, manufactures, sells and services diesel engines and related technology around the world. Cummins serves its customers through its network of 500 company-owned and independent distributor facilities and more than 5,200 dealer locations in over 190 countries and territories.
Cummins complementary business units design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems.
Thesis:
While CMI has had a nice run YTD, there is still plenty of room in this stock. CMI is the technology leader with the strongest product line relative to its peers. It is the largest manufacturer of natural gas and hybrid bus engines in the United States. CMI has exposure to high growth markets with 60% of its sales derived from international markets (30% from Asia). The company should benefit from long-term growth trends related to the changing global emission standards over the next five years as well as growing infrastructure and the need for cleaner energy.
While CMI’s sales are expected to grow at a double-digit rate through 2014, its profitability looks even more promising. CMI has recently taken restructuring initiatives to lower costs and improve operational efficiency. The company is expecting 12.5% EBIT by 2014, up from 7.2% in 2009. Given CMI’s strong management team and its positioning in the marketplace, this seems to be an achievable goal. Furthermore, CMI boasts a strong balance sheet and an industry leading ROE of 12.2%. The stock is trading at 16x forward estimates, given normalized earnings; we believe the stock has nearly 20% upside from current levels.
Catalysts:
- With over 65% of CMI’s revenues tied to early cycle activities, we expect that economic indicators, specifically improvements in industrial production will continue to bode well for CMI.
- We look for a continued upward revisions to analysts’ estimates.
- Possible dividend increase and stock buyback.
| 2009 Key Statistics | |
| Revenues | $10.8B |
| EBIT | $683M |
| Net income | $428M |
| Operating margin | 6.30% |
Five Year Stock Performance
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| CMI Financials | |||
| 2007 | 2008 | 2009 | |
| Income Statement | |||
| Revenue | 13,048 | 14,342 | 10,800 |
| Operating Income | 1,158 | 1,272 | 682 |
| Net Income | 739 | 755 | 428 |
| Basic EPS | 3.72 | 3.87 | 2.17 |
| Avg. Diluted Shares Outstanding | 200 | 197 | 198 |
| Balance Sheet | |||
| Current Assets | 4,815 | 4,713 | 5,003 |
| Non Current Assets | 3,380 | 3,806 | 3,813 |
| Total Assets | 8,195 | 8,519 | 8,816 |
| Current Liabilities | 2,711 | 2,639 | 2,432 |
| Total Liabilities | 4,786 | 5,289 | 5,043 |
| Shareholder Equity | 3,409 | 3,230 | 3,773 |
| Cash Flow | |||
| Cash From Operations | 810 | 987 | 1,137 |
| Capital Expenditures | -420 | -543 | -310 |
| Free Cash Flow | 390 | 444 | 827 |
Earnings Estimates
http://phx.corporate-ir.net/phoenix.zhtml?c=112916&p=irol-estimates