Union Pacific Corp (UNP)

http://www.up.com

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%

Five-Year Stock Performance

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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