UNP Exhibits Industry Strength Union Pacific Corporation (UNP) April 19, 2016

Krause Fund
Spring 2016
Union Pacific Corporation (UNP)
April 19, 2016
Stock Rating:
Industrials – Railroads
Analysts
Current Price $82.84
Target Price Range $86 – 96
Nicole Gierman
[email protected]
Sam Stecker
[email protected]
UNP Exhibits Industry Strength
Troy Radtke
[email protected]
Carson Goodale
[email protected]
• Location of Rails & Int’l Transportation – UNP
has access to every state west of Chicago as well as all gateways
to Canada and Mexico. Their intermodal distribution also allows
for transportation of commodities between the U.S. and abroad
Company Overview
Union Pacific Corporation (UNP) is one of the dominant
transportation companies in North America. It provides
customers in 23 states with transportation via railroads
through its principal operating company of Union Pacific
Railroad Company – this is comparable to its main
competitor, Burlington Northern Santa Fe, which operates in
28 states. Union Pacific is a Class I railroad that connects the
Western two-thirds of the United States with Canada and
Mexico with its rail networks consisting of over 32,000 miles.
UNP’s advantage over its competitor’s includes providing
services using over 8,500 locomotives to move its diversified
business mix which consists of Agricultural Products,
Automotive, Chemicals, Coal, Industrial Products and
Intermodals.
Stock Performance Highlights
52 week High
52 week Low
Beta Value
Average Daily Volume
HOLD
$111.38
$67.06
1.111
5.9 m
• Diverse Product Mix – diversification of commodities
in UNP’s product mix has allowed for stable revenues over the
past seven years and reduces risk exposure
• Low Oil Makes Intermodal Attractive – surpluses
of oil inventory have resulted in decreased oil prices, making
transportation via intermodal more attractive for consumers and
more profitable for Union Pacific
• Decrease in Coal Causes Concern – shift toward
cleaner energy has caused a decline in freight revenues in one of
Union Pacific’s largest commodity groups
• Increase in Capital Expenditures – Union Pacific is
spending more on capital expenditures to make rail freight
transportation safer and more efficient
One Year Stock Performance
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS (TTM)
P/E Ratio
Dividend Yield
$68.46 b
843 m
$24.38
$5.49
14.79
2.67%
Company Performance Highlights
ROA
ROE
Sales
9.41%
22.78%
$21.81 b
Financial Ratios
Current Ratio
Debt to Equity
1.29
68.6%
i
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Executive Summary
We recommend Union Pacific Corporation as a HOLD.
Union Pacific’s exposure to risk is much lower than its
competitors due to its diversified business mix of six
commodities. We are concerned about the possibility
of rising interest rates which would increase UNP’s
expenses for financing debt, as well as the decrease in
demand for coal shipments. However, we believe that
oil shipments combined with a more efficient
intermodal service will help offset the future losses.
Economic Outlook
Gross Domestic Product
Real GDP was reported as an annualized +1.4% for the
third and final estimate for 2015. This increase in the
revision of the estimate came from the boost in
personal consumption expenditures which came in at a
+2.4% annualized rate.ii This increase in personal
consumption and real GDP positively impacts the
demand on railroad transportation. During prosperous
economic conditions, the industrials sector
outperforms other sectors due to increases in
consumer discretionary spending. Consumers and
businesses in a healthy economy tend to spend more
on goods. This drives demand for the transportation
industry, specifically for larger goods, to be transported
across the country via railroad. In 2002,
transportation-related goods and services accounted
for 10% - over $1 trillion – of U.S. GDP.iii This shows
the strong correlation between the rail freight
transportation and the status of the overall economy.
The 2016 outlook we have for Real GDP is slightly
lower than the 2015 annualized Real GDP. We predict
Real GDP to come in around 2.2% due to a combination
of factors. First, our team believes that personal
income will increase, just as it has every month of this
year. Since the beginning of 2016, personal income has
increased, on average, about 0.33% month over month.
This increase will drive growth in the economy as
consumer spending accounts for two-thirds of the U.S.
GDP.iv We believe this growth will be hindered by the
strengthening of the U.S. Dollar. A stronger U.S. Dollar
indicates a decrease in exports of U.S. goods, and
increasing imports of foreign goods. This impact will
have a negative effect on Real GDP; however, we
believe it will have a positive impact on the railroad
industry, as there will be a demand for transporting
products that are shipped across seas.
Price of Oil
The price of crude oil continues to remain low at
roughly $40 per barrel. There was an important
meeting held Sunday, April 17th in Doha by OPEC to
discuss the possibility of freezing production of crude
oil in order to raise the price of crude oil per barrel.v
After not reaching a production freeze, we believe that
the price of crude oil will remain stagnant around
current prices. These low prices will be a result of
inventory levels as they are at a record breaking 536.5
million barrels.vi
vii
ii
The figure above shows the crude oil inventories for
the United States for the past five years, and shows that
current inventories are 78 million barrels higher year
over year.
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The decrease in the price of oil has a positive impact on
domestic logistics companies, as fuel expenses are a
major component of their operating expenses. One
concern railroad companies may face is the threat of
competition from trucking companies when oil prices
are lower. Rail transportation is more fuel efficient and
cost effective when fuel prices are high. We believe
fuel prices will return to higher levels if an agreement
with OPEC is reached regarding a production freeze.
Manufacturing Index
The ISM Manufacturing Index level for March rose
2.3% to a plus-50 reading for the first time since
September, 2015.viii This plus-50 reading indicates a
slight growth in the manufacturing industry, and is a
positive signal for the performance in the railroad
industry and economy. Increases in production of new
orders and other manufacturing products will increase
demand for shipment via railroad. With increases in
shipping demands, rail companies will be utilizing
higher capacity of its rail network and rail cars.
Interest Rates
Currently, the effective Fed Funds Rate sits at 0.37%
after an increase of 25 basis points in December. This
minor increase is significant as the Federal Reserve
works toward its goal of 2% inflation; it also decreases
the amount of loanable money. In the short-term, we
believe the Fed will maintain their interest rate range
of 0.25-0.50%. However, due to the high amount of
money in circulation, we predict a large increase in
interest rates in the next 3-5 years. This will impact
companies in all sectors by making debt financing more
expensive due to an increase in the cost of debt. The
railroad and trucking industries are very capital
intensive meaning this increase in interest rates will
have a large impact on the industry and will slow
growth in the long run.
Capital Markets Outlook
Data from 2015 has shown a strong correlation
between the S&P Industrials Index and the S&P 500
with a value of 0.94.x This positive correlation is also
reflected in the returns over the past 5 years. The S&P
500 Index has had returns of approximately 57.67%;
while the S&P Industrials Index has seen returns of
50.96%.xi
This information is reflective of the seasonality of the
industrials sector and its dependence on market
performance. During prosperous economic times, the
industrials sector tends to perform in line with the
market; at the same time, when markets are in
recession, the industrials sector follows suit and
underperforms the S&P 500 index.
ix
The graph above shows the manufacturing index data
over the past 58 years with the highlighted areas
showing the 11 economic recessions that have
occurred during this time. The Manufacturing Index
data reported before four of the eleven recessions
shows values above the favored 50% mark; this shows
that this index is not a completely viable way of
forecasting for the economy. However, in the shortterm outlook, this boost in manufacturing will have a
positive impact on the railroad industry.
From this information, we believe the best time to
invest in the industrials sector would be during a
recession. Industrials are very cyclical and tend to
outperform other sectors early on as the economy
recovers from the recession.
Industry Analysis
Industry Overview
The industrials sector is comprised into three main
sectors. The three sectors according to the Global
Industry Classification System are capital goods,
commercial services, and transportation. The three
main industrials sectors are split up into thirteen
3|Page
different sub-sectors. First, the capital goods sector is
comprised of aerospace and defense, building products,
construction and engineering, electrical equipment,
industrial conglomerates, and machinery. The
commercial services sector includes commercial
services and supplies. Finally, the transportation sector
consists of air freight and logistics, airlines, marine,
road and rail, and transportation infrastructure.
Throughout the remainder of this report, we will be
focusing on the road and rail industry of the
transportation sector.
railroad companies’ total miles of track and revenues.
When comparing the seven companies, we can see that
Union Pacific’s greatest competition comes from BNSF.
2015 Class 1 Rail
Revenues (Billions)
$21.81
$21.97
$10.51
$2.42 $11.25
$12.03
BNSF
Canadian National
Canadian Pacific
Kansas City Southern
Norfolk Southern
Union Pacific
The chart above breaks down the 2015 revenues for
the seven Class I railroads. Union Pacific finished 2015
with revenues of $21.81 billion, falling only short to
Burlington North Santa Fe which reported revenues of
$21.97 billion. Union Pacific and BNSF both have
32,000 miles of track spanning across the United
States. The figures below show the seven Class I
Miles of
Track
BNSF
$21.97
32,000
Canadian Pacific
$11.25
15,000
Canadian National
Sub-Industry Railroads
The United States freight rail network is widely
considered one of the most dynamic freight systems in
the world. The $60 billion industry is comprised of
seven Class I rails (railroads with operating revenues of
$433.2 million or more), 21 regional railroad, and 510
local railroads. All together, these railroads span over
140,000 miles of rail track. The seven Class I freight
railroads consist of BNSF Railway, Canadian National,
Canadian Pacific, CSX Transportation, Kansas City
Southern Railway, Norfolk Southern Combined
Railroad Subsidiaries, and Union Pacific Corporation.
These seven Class I freight railroads make up over 70%
of all the rail track within the United States.xii
Revenues
(billions)
Company
CSX Transportation
Kansas City
Southern
Norfolk Southern
xiii
Union Pacific
$12.03
$11.81
$2.42
$10.51
$21.81
21,421
21,000
6,000
20,000
32,000
Products
Below is a chart showing the different segments of
revenue for the railroad industry. The segments of
revenue consist of food and consumer goods market,
consumers, agricultural market, miscellaneous mixed
shipments, chemical market, coal market, industrial
goods market, and other revenues. The three main
segments are chemical market at 13.6%, coal market at
18.7%, and industrial goods market which is 24.1%.
Recent Developments and Trends
Government Regulation
The Railroad industry plays a critical role in the U.S.
economy, and reaches almost every state. Due to this
xiv
4|Page
nature, the government heavily regulates this industry
to ensure a safe environment for transportation of
goods for industry workers and consumers.
One recent requirement for railroad companies was the
development and implementation of Positive Train
Control (PTC) which was a part of the Rail Safety
Improvement Act passed by Congress in 2008. This act
was a response to several fatal accidents that occurred
between 2002 and 2008.xv Initially, railroad companies
were required to develop and install highly advanced
technologies designed to make freight rail
transportation even safer by automatically stopping a
train before certain types of accidents occur by 2015.xvi
This deadline was proved “unworkable” by railroad
companies; they were given a 3-year extension to
complete the installation of PTC by December, 2018.
One major issue that companies face is the costs
associated with the financing of PTC and maintenance
of current infrastructure as companies must privately
fund and develop all aspects of PTC and future projects.
To date, railroad companies have spent approximately
$6 billion on PTC development and deployment.xvi
Based on our analyses and predictions for future, longterm interest rates, we believe these expenses will
gradually increase over the remainder of the three
years as the cost of debt for rail companies will
increase. While the benefits of PTC includes a safer
environment for railroad workers and the general
public, in the end, the expenses associated with this
project will hurt future earnings and cash flow across
all rail companies.
Shift Towards Cleaner Energy Sources
Recent advances in technology have launched a shift
towards using cleaner energy sources such as natural
gas and renewable energy like wind. This is
detrimental to the railroad industry as, historically,
coal has been the single most important single
commodity carried by U.S. railroads.xvii Use of cleaner
energy has decreased the demand on coal, thus
decreasing the revenues generated from shipping coal.
For example, the year-over-year data from March 2015
to March 2016 of coal shipments show a decrease of
35.9%, or 188,250 carloads.xviii This decrease will have
lasting impacts across the industry – in order to combat
this, rail companies will have to diversify their business
mix in order to salvage their bottom line.
Porter’s Five Forces
Threat of New Entrants
The railroad industry is highly capital intensive
especially for companies that are considered Class I
Railroads. For example, from 2002-2011, the
Association of American Railroads stated that the
average U.S. manufacturer had a CapEx to Revenue
ratio of 3.0%, while rail freights had a CapEx to
Revenue ratio of 17.0%.xix This large amount of capital
expenditure for developing and maintaining
infrastructure makes its nearly impossible for new
entrants to enter the market. In the end, we believe
there is little threat of new entrants in this industry.
Competitive Rivalry
Although Class I Railroads include seven companies,
the industry is dominated by four – Burlington
Northern Santa Fe Corporation (BNSF), Union Pacific
Corporation (UNP), CSX Corporation (CSX), and Norfolk
Southern Corporation (NSC). These companies account
for 87.4% of the market share in this industry.
Within the industry, companies compete on the basis of
travel time, fuel consumption, safety, regulations, and
destinations.xix All companies are required to comply
with regulations set forth by the government; many of
these regulations surround the safety of rail workers
and the transportation of commodities.
As for rail destinations, the map below shows the
different locations in which the seven largest railroads
compete. The map shows that the firms compete in
different locations rather than concentrating on one or
two sections of the U.S. UNP and BNSF have operations
in the Midwest and Western United States, while CSX
and NSC have a large presence on the Eastern part of
the U.S. This creates large competition among the firms
in their respective locations.
5|Page
xx
In addition to destinations, these same firms also
compete on the basis of travel time and fuel
consumption. Companies improve on these factors by
improving infrastructure, including trains and tracks,
in order to improve transportation time and fuel
efficiency. The chart below compares the dwell time
and train speeds of the four key players in the industry.
The combination of low dwell time and faster speed
increases reliability and efficiency of railroad
infrastructure.
Dwell Time
(Hours)
Train
Speed
(MPH)
xxi
UNP
BNSF
27.1
28.7
26.8
24.1
CSX
25.3
21.0
NSC
23.3
Bargaining Power of Suppliers
Capital expenditures in the rail industry create high
barriers of entry for potential competition – this same
factor also creates strong bargaining power for
suppliers. Companies are dependent on a select
number of suppliers to provide reliable equipment and
infrastructure. The low number of suppliers of
locomotives and rails proves that there are high
barriers of entry for railroad suppliers. A decrease in
manufacturing of locomotive engines and rails from
suppliers would create significant expenses for all
companies in the industry. In order to keep these
expenses reasonable, companies must keep suitable
relationships with their suppliers.
Threat of Substitutes
Freight can be moved in ways other than by railroad,
thus creating threats of substitutes for the railroad
industry. Substitutes include other modes of
transportation such as trucks, airplanes, barges, and
pipeline. The chart below shows a breakdown of the
amount of freight in percent ton-miles moved by each
mode of transportation. From this, we are able to see
that rail’s greatest threat comes from transportation
via trucks. Railroads see an advantage over trucking
for shipping larger loads of freight over longer
distances. Rail also benefits when fuel prices are
higher as they tend to be nearly four times more fuel
efficient than trucks.xxii
23.8
When comparing these companies, it is also critical to
consider the diversification of their business mix. As
stated earlier in the report, we believe the shipment
volumes of coal and its revenues will continue to
decrease, thus making it crucial for companies to
diversify their product mix in order to manage their
losses. Although UNP has lower train speed and
greater dwell time, they have a more diversified
business mix consisting of six commodities compared
to BNSF’s business mix of four. This allows Union
Pacific to continue to compete with BNSF despite UNP
trailing in other factors such as dwell time and train
speed.
xxiii
In response to this competition, railroad companies
have implemented intermodal transportation. This
solution combines transportation of freight by
combining railroads with trucks or barges. Intermodal
has become the fastest growing segment in North
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American freight transportation with nearly 25 million
containers moving across the continent each year.xxii
Bargaining Power of Buyers
Due to competition with substitute, we believe the
bargaining power of buyers to be medium. We came
up with this based on the diversification of
commodities transported by railroads across the
industry as well as the threat of substitutes railroads
face. In order to mitigate any risk associated with their
business mix, rail companies choose to ship
commodities with low correlation among each other.
This results in wide exposure – if a few commodities
perform poorly, it is typically offset by the remaining
commodities in the diversified mix. At the same time,
consumers have the ability to have their products
shipped in a more time-efficient manner via trucks. For
these reasons, we believe the bargaining power of
buyers is moderate.
Industry Leaders and Followers
There are seven companies in the railroad industry, but
there are four major companies that make up over 87%
of the market share for the railroad industry. The
impact on how large these four major companies are on
the railroad market can be seen in the table below.
Company
UNP
BNSF
CSX
NSC
CP
CNI
KSU
xxiv
Market
Cap
$61.18B
N/A
$24.92B
$24.15B
$22.30B
$49.83B
$9.89B
P/E
14.73
N/A
13.04
16.00
22.25
18.55
20.79
Market
Share
29.6%
N/A
14.4%
13.3%
6.6%
4.3%
1.7%
Profit
Margin
21.88%
N/A
16.66%
14.80%
20.14%
28.06%
19.99%
(BNSF was acquired by Berkshire Hathaway in 2009, so its numbers are
disregarded in the above table)
Market capitalization is an important instrument in
comparing the seven Class I railroad companies with
each other. It measures the market value of shares
outstanding of a company. As seen above, UNP has the
greatest market cap of all the railroad companies at
$61.18 billion.
Price-to-earnings ratio is able to suggest the dollar
amount investors can expect to invest in order to
receive $1 of a company’s earnings. It is a tool that can
also be used to help determine a company’s future
earnings growth. A higher P/E ratio suggests that a
company is going to have a higher earnings growth
than that to a company that has a lower P/E ratio.
Union Pacific has the fifth highest P/E ratio amongst
the seven Class I railroad companies.
Market share is able to show how large a company is
compared to its competitors. Market share is
calculated by taking a company’s sales and dividing
them by the total sales of the industry. Union Pacific
has the greatest market share at 29.6%, excluding
BNSF due to it being acquired by Berkshire Hathaway.
Profit margin measures how much out of every dollar
generated by sales a company actually keeps in
earnings. Profit margin gives us an idea of how much
revenue is being made after all expenses are paid. CNI
has the greatest profit margin of the seven Class I
railroad companies, with UNP coming in second with a
profit margin of 21.88%.
Catalysts for Growth/Change
Oil Prices
With oil prices continuing to decrease, the input prices
for companies such as Union Pacific also decrease
which allows for Union Pacific to increase its profit
margin. Oil inventory levels are the highest they have
ever been, increasing the amount of transportation
needed for oil. However, the lowering of oil prices also
has drawbacks for the company. Transportation by
railroad is much cheaper than other forms of
transportation when fuel prices are high. With fuel
prices so low, it makes it easier to ship with trucking or
other forms of transportation due to the lower cost.
Consumer Spending
The Consumer Confidence Index increased to 96.2 in
March, up 2.2 points from February.xxv Consumer
spending will also increase due to a rise in consumer
confidence. The railroad and transportation industries
are directly affected by an increase in consumer
spending. With an increase in consumer spending,
comes an increase in transportation of these products
that are now being purchased. UNP has a great
opportunity to capitalize on being able to transport the
abundance of products being transported due to higher
consumer spending.
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Company Analysis
Overview and Business Description
Union Pacific Corporation (UNP) is one of the largest
transportation companies in North America, mainly
operating in the western two-thirds of the United
States. UNP provides customers in 23 states with
transportation via railroad networks consisting of
32,084 rail miles. Only Burlington North Santa Fe is
larger, operating in 28 states with 32,500 rail miles.
UNP is a Class I railroad with over 8,500 locomotives
currently in operation. UNP is the only rail
transportation with access to all the major gateways in
the United States, Mexico, and Canada. The freight
traffic of UNP is broken down into three main
categories: bulk, manifest, and premium business. Bulk
traffic relates to transportation of a single commodity
from one source to one destination. Manifest traffic
pertains to individual carloads or less than train-load
business transporting commodities. Lastly, the
transportation of auto parts or intermodal containers
takes up what is called the premium business. UNP has
a diversified product mix consisting of six main
commodity groups. These six main commodity groups
are agricultural products, automotive, chemicals, coal,
industrial products, and intermodals.
flow from financing activities has also been negative
and is driven heavily by their repurchases of common
and preferred stock. This proves that Union Pacific is
in the maturity stage because they are able to purchase
assets that are critical to business activities using
capital. The negative values of financing cash flow
shows that the company is not dependent on outside
investors to raise capital – they have generated enough
cash that they are able to afford stock repurchases
while paying dividends.
Products
In 2015, UNP was able to generate $20.4 billion in
freight revenues from the six major commodity groups.
Below is a chart showing the revenue breakdown of the
six major commodities for 2015.
Life Cycle
In order to determine that Union Pacific is in the
Maturity Stage of the life cycle, we started by looking at
the Income Statement and analyzing revenues, net
income, and profit margin. Over the past seven years
(2009 to 2015), Union Pacific has reported strong sales
revenue growth year-over-year; this is also
accompanied by stable, positive numbers reported as
net income. The most important metric that proves
that Union Pacific is in the Maturity Stage is their
strong profit margin that was recorded as 21.88% for
FY15. This proves the efficiency of the company as well
as its ability to distribute dividends to investors and
cover any debt.
Next, we analyzed the statement of cash flows in order
to further prove our assumption. Cash flow from
operating activities has been stable and positive since
recovering from the recession in 2008. This is followed
by steady, negative cash flows from investing activities;
this is led by capital expenditures. And finally, cash
xxvi
Intermodal Products
Intermodal business is broken down into two
segments: international and domestic. Together,
international and domestic intermodal products make
up the largest portion of Union Pacific’s 2015 freight
revenue at 20%. International intermodal products
mainly consist of the importation and exportation of
container traffic through the ports along the West
Coast. International intermodal declined 8% from 2014
to 2015 and accounted for the overall 6% decline in
carloadings. This decline was attributed to supply chain
distributions stemming from the West Coast port work
disruptions.xxvi We believe this decrease is also
impacted by the appreciation of the US Dollar as
consumers abroad must pay a premium for USproduced goods, thus decreasing international
shipments by Union Pacific. Domestic intermodal
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business includes the container and trailer pick-up and
delivery within North America.
Industrial Products
Industrial products generated the second most revenue
in 2015 for Union Pacific at 19%. Industrial products
include construction products, minerals, consumer
goods, metals, lumbar, paper, and other miscellaneous
products. Industrial products declined 13% from 2014
to 2015. We believe that this relates to large
inventories of oil and not having the need to drill for
oil. Oil drilling increases the demand for raw steel,
finished pipe, frac sand, and stone and drilling fluid
commodities.
Coal
Shipments of coal accounted for 16% of Union Pacific’s
2015 freight revenue. Volume shipments of coal have
been on the decline, especially for fiscal year 2015
where coal revenues dropped 22%. An overabundance
of supply and low natural gas prices have left Union
Pacific with the challenge of taking on extra expenses
associated with the shipment of coal. As utility
companies shift towards using other fuel sources such
as natural gas, we believe Union Pacific will continue to
see negative impacts from shipping coal. There is also a
trend for consumers and businesses to use cleaner,
more environmentally friendly means of energy and
coal doesn’t meet that standard. Coal consumption and
production have declined recently, and coal production
is expected to decrease by 16% in 2016, the largest
annual decline in coal production since 1958.xxvii We
believe that coal shipments are going to continue to
decline going forward. Union Pacific needs to assess its
future shipping demands in coal in order to minimize
losses.
Chemicals
The transportation of chemicals generated 17% of
freight revenues for Union Pacific in 2015, down 3%
from the previous year. Union Pacific’s chemical
shipments include four categories: industrial
chemicals, plastics, fertilizer, and petroleum and liquid
petroleum gases. The majority of the chemical
shipments for Union Pacific are from Gulf Coast areas,
where 60% of the chemical companies for Union Pacific
originate.
Automotive
Union Pacific is the largest automotive carrier west of
the Mississippi river and has access to over 40 vehicle
distribution centers. Freight revenues generated by the
transportation of automotive products was 11% of
total freight revenues, up 2% from the previous year.
Although automotive revenues made up the smallest
portion of total freight revenues for 2015, we believe
that automotive shipments are going to continue to
rise, thus experiencing a positive impact on automotive
freight revenue going forward.
Agricultural Products
Agricultural products made up for 17% of total freight
revenues for 2015, a 5% decline year over year.
Agricultural products include the shipment of grains,
foods, grain processors, animal feeders, and ethanol
producers.
Competition
Union Pacific has a large presence to the West of
Chicago and Memphis, expanding to gateways in
Canada and Mexico. Based on their geographic location
and routes, UNP’s main competition within the railroad
industry comes from Burlington Northern Santa Fe
(BNSF) as it operates parallel routes in many of Union
Pacific’s corridors.xxviii An advantage that Union Pacific
holds over BNSF is its accessibility to a larger number
of international corridors into Mexico and Canada.
Union Pacific also has greater diversification of its
business mix with six commodities, while BNSF only
has a business mix of four commodities. This increased
access to the corridors as well as its diversified
business mix gives Union Pacific a competitive
advantage over BNSF. Union Pacific has the ability to
reach a larger amount of consumers internationally,
while also being able to offset any losses generated by
falling shipments in commodities.
In addition to other rail companies, Union Pacific faces
competition from trucking, airplane, and barge
companies. One large advantage these firms have over
Union Pacific is the public funding for infrastructure
and roads. Union Pacific is responsible for maintenance
associated with its rails and locomotives; this increased
expense is then passed on to the consumer. The use of
roads also allows for greater accessibility to reach
customers and geographic areas that don’t fall within
Union Pacific’s reach. To compete with these
9|Page
companies, Union Pacific uses its intermodal
distribution to reach greater amounts of end
consumers. Union Pacific must also compete heavily
with these other modes of transportation when fuel
prices are low. Low fuel prices allow for trucking,
airplane, and barge companies to keep prices and costs
low; however, when fuel prices are high, railroads
benefit as they are more fuel efficient.
Investment Positives
•
•
•
Diversified product mix decreases exposure to
risk associated with lower shipment volumes
Increased inventory of oil is driving growth in
oil shipment via rail
UNP has a low debt-to-equity ratio compared to
its competitors
Investment Negatives
•
•
•
Demand for coal will decrease, causing lower
shipment volumes over forecasted 5-6 year
period
Low fuel prices push consumers to substitute
rail shipping for other modes of transportation
Rising interest rates will increase the cost of
debt and financing for Union Pacific
Valuation Analysis
For this report, we used four types of valuation models
to conclude that Union Pacific is undervalued. We used
a Discounted Cash Flow analysis, Economic Profit
analysis, Dividend Discount Model, and relative
valuation to come up with our assumption. From our
analyses, we have determined Union Pacific to be a
HOLD with an intrinsic stock price above the current
trading price of $82.84.
Our DCF and EP models gave us an intrinsic value of
$91.47. This is a premium of 10.4% relative to its
current trading price on April 19, 2016. As for our
DDM model, we produced a price of $80.10 – a discount
of 3.42% from its current price. We then used Relative
Price-to-Earnings (P/E) and PEG ratios for our relative
valuation models. The Relative P/E ratio gave us the
intrinsic values of $101.25 and $86.07 for 2016 and
2017 respectively – both are premiums of 22.22% and
3.90%. For our PEG ratio, we found the values to be
premiums for both 2016, at $109.57, and 2017, at
$102.11. Both of these numbers came in at premiums
of about 32.27% and 23.62% respectively.
General Assumptions
Revenue Decomposition
In order to determine future revenue streams for
Union Pacific, we looked at previous data starting after
the 2008 recession. This was a critical time period to
choose as we believe the recovery of Union Pacific and
the economy as a whole is in a much different state
than it was prior to, and during, the recession. We
generated revenue growth assumptions for each of the
six commodities that are a part of UNP’s business mix;
after, we estimated the growth in the number of
carloads for each commodity as well.
Forecasting the revenues of each commodity were
chosen by looking for the average growth in revenue
over the previous 5-7 years. Upon finding the change
in growth, we modified our numbers based on any
expectations we had made, or were implied from our
economic and industry outlooks. For example, analysts
believe automotive sales will set a new record in 2016,
driven heavily by low fuel prices.xxix We also
considered other trends for commodities such as coal.
The recent shift towards cleaner energy use has
lowered the demand of coal – we had to be certain that
our revenue decline for that commodity was reflective
of the information reported in our economic and
industry outlooks.
Next, we determined carload growth using the average
growth of carloads from the past 3-5 years. Most of our
decisions were made similar to how we forecasted
revenue growth – we looked at trends set forth from
our economic and industry outlooks to estimate future
growth or decline in commodity carloads.
One factor we thought was important to point out was
that we had decided to be a more conservative in our
estimation of revenue and carload growth. We chose to
10 | P a g e
use these slightly reduced values due to the uncertainty
in economic outlooks. We believe outside factors such
as slow economic growth abroad and the strong U.S.
Dollar may produce lower growth rates than if we had
used a straight-line average.
Income Statement
Compensation and Benefits make up roughly 37.5% of
operating expenses for Union Pacific. They are the
largest driver of these expenses followed by Purchased
Services and Materials which accounts for 17.6% of
operating expenses.
Compensation and Benefits has been increasing over
the past 7 years. We believe this is due to extra
expenditure related to development and
implementation costs of PTC. This project has resulted
in increased hiring and training expenses related to a
larger workforce in the first half of the year.xxviii We
believe these expenses will continue through the
completion of PTC and beyond as Union Pacific will be
responsible for the maintenance of its infrastructure.
These expenses will also be maintained due to our
forecasted increase in interest rates, thus resulting in
inflation of wages and in the economy as a whole.
We also believe PTC has influenced expenses relating
to Purchased Services and Materials. This expense
includes services purchased from outside contractors
and other services providers, as well as materials used
to maintain UNP’s lines, structure, and equipment.
There was a decrease in these expenses from this line
item due to lower locomotive and freight car repair
costs. xxviii We believe these costs will continue for
reasons similar to Compensation and Benefits.
Based on these observations, we chose to grow Cost of
Goods Sold as a percentage of Sales because these costs
make up roughly half of Union Pacific’s operating
expenses.
Balance Sheet
The railroad industry is very capital intensive by
nature, making it important for us to focus on Property,
Plant and Equipment (PP&E) when forecasting our
balance sheet. We estimated growth in PP&E based on
the average CapEx rates for Gross PP&E over the past 7
years. In addition to this, we had to include PTC related
expenses for 2016-2018. PTC expenses were found
based on management discussion as they forecasted
another $825 million will be used over the course of
the next three years to complete the project.
Therefore, we forecasted the largest, most important
component of the balance sheet, PP&E, to reflect
historical CapEx rates adjusted for expenses related to
the PTC project.
Weighted Average Cost of Capital (WACC)
Cost of Equity
To find the cost of equity, we used the Capital Asset
Pricing Model. We obtained our beta using the
Bloomberg terminal to find weekly raw betas for 1, 5,
and 10 years. The raw beta we found, and used for our
project, was 1.111. Next, we found the risk-free rate
from the yield of a 30-year Treasury bond that matures
on February 15, 2046. Our Market Risk Premium was
found using the difference between the expected
market return (7.37%) and the risk-free rate (2.57%)
to come up with the MRP of 4.80%. We used this data
to arrive at our Cost of Equity of 7.90%.
Cost of Debt
We used the yield on Union Pacific’s longest
outstanding bond to find the pre-tax cost of debt. We
then adjusted this by the marginal tax rate to find the
after-tax cost of debt of 2.41%.
Capital Structure and WACC
For our valuation models, we held the assumption that
the capital structure will remain stable through our CV
of 2021. Using the Market Values of Equity and Debt,
we were able to come up with a WACC of 6.82%.
DCF and EP Analyses
Our Discounted Cash Flow and Economic Profit models
gave us an intrinsic stock price of $91.47 which is a
premium based on the current stock price. Our
assumptions for both models came from our Value
Drivers of ROIC, NOPLAT, WACC, EP, Invested Capital,
and FCF.
We started with the DCF Model using Free Cash Flow.
We predict FCF to decrease from 2016 to 2018 because
of the extra CapEx for the PTC project. We expect them
to recover as we predict revenues to grow while
Capital Expenditures decrease. We then used our CV
Growth rate assumption of 1.95% and WACC of 6.82%
to find the Continuing Value of $104,642 million. The
11 | P a g e
WACC was used again to discount the FCFs to find the
present value; the present values were then added
together to find the value of operating assets of
$93,720 million. After adjusting for operating and nonoperating assets, we found the value of equity to equal
$76,493 million. This number, divided by the number
of shares outstanding gave us the intrinsic value of
UNP’s equity; this was then adjusted for the fractional
period of the year as of April 19, 2016 for an adjusted
stock price of $91.47.
Our Economic Profit Model followed similar steps used
in the DCF Model. The main differences we had was the
use of Economic Profit instead of FCF and adding back
beginning invested capital to find the value of
operating assets. We used the same adjustments to
find the value of equity and to find the intrinsic stock
price of $90.08 which was adjusted by the fractional
period of the year. The final adjusted stock price for
the EP Model was equal to the price found using our
DCF Model ($91.47).
When determining our target price range, we relied
heavily on the DCF and EP models and their target
stock price. We believe the stock price found is a better
reflection of our economic, industry, and company
outlooks.
Dividend Discount Model (DDM)
Our Dividend Discount Model was another valuation
method used to find the intrinsic value of our stock.
We used our projected dividends per share and
discounted them back to the present value to find the
intrinsic stock price.
We started by using a payout ratio of 41% - this was
chosen based on the significant increase of almost 7%
in the payout ratio from 2014 to 2015. We used a CV
EPS growth rate of 2.25%; we arrived at this number
because we believe UNP will increase its earnings per
share due to the high number of repurchases it plans
on making. We used the CV EPS Growth rate, Cost of
Equity, and CV ROE to find the P/E Multiple; this was
multiplied by the projected 2021CV EPS to find the
future stock price. This was then discounted, along
with the projected dividends per share for 2016 to
2020, by the cost of equity to find the discounted cash
flows. The sum of these numbers was our intrinsic
value of $78.88 – this was adjusted for the fractional
period of the year to find the adjusted stock price of
$80.10.
We moderately took our DDM stock price of $80.10
into consideration when determining our target stock
price range. We believe UNP has a strong history of
paying dividends, but at this point in time, stronger
outside factors that affect the economy and industry
will play a larger role in determining the value of Union
Pacific.
Relative Valuation
When starting our Relative Valuation, we turned to
BNSF because they are Union Pacific’s largest
competition. We were unable to find the necessary
data for BNSF as they are a fully-owned subsidiary of
Berkshire Hathaway. Had we used the data for
Berkshire Hathaway Class A shares, our data would
have been heavily skewed and obsolete.
In order to find the valuation based on similar
companies, we had to choose the data for the next five
largest rail companies that compete with Union Pacific
– CSX Corporation (CSX), Canadian Pacific Railway
(CP), Canadian National Railway (CNI), Kansas City
Southern (KSU), and Norfolk Southern Corporation
(NSC). We chose to use P/E ratios for 2016 and 2017
when using relative valuation. We found the Relative
P/E prices to be $101.25 for 2016 and $86.07 for 2017.
We believed the price for 2016 was relatively high
given the analyses we completed on the economy,
industry, and company. We believed the 2017 price
was a relatively low, but reasonable starting price for
our target price range.
Sensitivity Analysis
Due to the many assumptions made throughout all of
our valuation models, our prices are sensitive to
certain metrics used from our inputs. We used data
tables to analyze the sensitivity levels of various
structural and operating assumptions and their effects
on stock price.
Beta
The beta we used, as stated earlier in the report, is an
average of the raw betas over different periods of time.
Any change in the beta will be reflected in the stock
12 | P a g e
price moderately. An increase of two tenths (1.311)
will result in a decrease of the stock price by roughly
$15. We are confident in our decision of having a beta
of 1.111 to come up with our intrinsic stock price
because of the cyclical nature and correlation that the
industrials sector, and Union Pacific in particular, has
with the market.
Market Risk Premium
Market risk premium is found by finding the difference
between the expected return of the market and the
risk-free rate. Due to the nature of this assumption,
this value could change based on the risk tolerance and
investing styles of the investor – a riskier investor
would expect a higher return from the market,
resulting in a higher market risk premium. If we
increased our market risk premium we end up getting
a lower intrinsic stock price.
COGS as a percentage of Sales
COGS as a percentage of Sales is similar to SG&A as a
percentage of sales because it is an operating
assumption. Our rate of 48% was chosen based on a
straight-line average over the period of 5 years. We
believe this is a good value because it is reflective of
recent economic and company trends.
Risk Free Rate
Yields on Treasury bonds have recently gone up due to
the Feds raising interest rates to 25-50 basis points.
As a result of this increase, we are able to see that
Union Pacific’s stock price will decrease as it will be
more expensive to finance debt.
CV Growth of NOPLAT
The assumption for CV Growth of NOPLAT is
dependent on the economic outlook and is subject to
preferences by the particular analyst. We have a
moderate growth rate of 1.95% because of our
conservative stance throughout our models given the
nature of the railroad industry. Increasing the CV
Growth of NOPLAT to a more optimistic number such
as 2.45% would cause an increase in our stock price of
about $5.
WACC and Cost of Equity
The WACC is critical to our valuation models as it is
used to discount FCF and EP to find the present value;
the Cost of Equity is important for the discounting of
dividends. The Cost of Equity does not have as
significant a role as WACC; this is seen when we
increase the Cost of Equity 50 basis points – the stock
price does not move as much as when we change the
WACC.
SG&A as a percentage of Sales
SG&A is an operating assumption so management is
able to manipulate the numbers. By controlling the
numbers, management is able to achieve a certain stock
price. If management decides to decrease SG&A as a
percentage of sales, stock price will increase but not by
much.
13 | P a g e
References
Union Pacific Corporation. Google. (n.d.). Retrieved
April 17, 2016, from
https://www.google.com/webhp?sourceid=chrom
e-instant&ion=1&espv=2&ie=UTF8#q=UNP+Stock+1year
ii. GDP. (n.d.). Retrieved March 25, 2016, from
http://www.bloomberg.com/markets/economiccalendar
iii. Bureau of Transportation Statistics. Economic
Impact on Transportation. (n.d.). Retrieved March
15, 2016, from
http://www.rita.dot.gov/bts/programs/freight_tra
nsportation/html/transportation.html
iv. Payne, D. (2016, April 1). GDP Growth Slowed by
Strong Dollar's Drag. Retrieved April 17, 2016,
from http://www.kiplinger.com/article/business/
T019-C000-S010-gdp-growth-rate-andforecast.html
v. Oyedele, A. (2016, April 17). Crude Oil Plunges after
Producers' Meeting in Doha Flops. Retrieved April
17, 2016, from
http://www.businessinsider.com/crude-oil-priceapril-17-2016-4
vi. EIA Petroleum Status Report. (2016, April 13).
Retrieved April 17, 2016,
from http://www.bloomberg.com/markets/econo
mic-calendar
vii. Berman, A. (2016, April 15). Are We On The Right
Track To An Oil Price Recovery? Retrieved April 17,
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viii. ISM Manufacturing Index. (n.d.). Retrieved April 17,
2016, from
http://www.bloomberg.com/markets/economiccalendar
ix. Mislinski, Jill. (2016, April 1). ISM Manufacturing
Index: Expansion in March, First in Seven Months.
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from
http://www.advisorperspectives.com/dshort/upd
ates/ISM-Manufacturing
x. Bausys, M. (2016, January 12). U.S. Stock Market
Sectors: Correlations. Retrieved April 18, 2016,
from http://seekingalpha.com/article/3805416-us-stock-market-sectors-correlations
i.
xi. Sector Tracker: S&P 500 Index. (n.d.). Retrieved
April 18, 2016,
from http://www.sectorspdr.com/sectorspdr/tool
s/sector-tracker
xii. Freight Rail Today. (n.d.). Retrieved April 18, 2016,
from https://www.fra.dot.gov/Page/P0362
xiii. 140,000-Mile Private Rail Network Delivers for
America's Economy. (n.d.). Retrieved April 18, 2016,
from http://archive.freightrailworks.org/network/
union-pacific/
xiv. IBISWorld. (2016). IBISWorld. Retrieved from
Industry at a Glance
http://clients1.ibisworld.com/reports/us/industry
/productsandmarkets.aspx?entid=1133#PS
xv. Rail Safety Improvement Act of 2008 (RSIA). (n.d.).
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https://www.fra.dot.gov/Page/P0395https://ww
w.fra.dot.gov/Page/P0395
xvi. Association of American Railroads. (n.d.). Positive
Train Control. Retrieved April 18, 2016, from
https://www.aar.org/policy/positive-train-control
xvii.
Association of American Railroads. (n.d.). What
We Haul. Retrieved April 18, 2016, from
https://www.aar.org/todays-railroads/what-wehaul
xviii. Association of American Railroads. (2016, April
6). AAR Reports Week Rail Traffic for March and
Week Ending April 2, 2016. Retrieved April 19,
2016, from
https://www.aar.org/newsandevents/PressReleases/Pages/2016-04-06-railtraffic.aspx
xix. IBISWorld. (2016). IBISWorld. Retrieved from
Competitive Landscape
http://clients1.ibisworld.com.proxy.lib.uiowa.edu/
reports/us/industry/competitivelandscape.aspx?e
ntid=1133#BOC
xx. Aberdeen Carolina & Western. (n.d.). Freight Rail
Map of Class I Carriers in North America. Retrieved
April 19, 2016,
from http://www.acwr.com/economicdevelopment/rail-maps/class-i-freight-carriers
xxi. Railroad Performance Measures. (n.d.). Retrieved
April 19, 2016, from http://www.railroadpm.org/
xxii.
The Motley Fool. (n.d.). How Does Union Pacific
Stack Up Against the Rest of the Railroad Industry?
Retrieved April 18, 2016, from
http://www.fool.com/investing/general/2015/04
/07/how-does-union-pacific-stack-up-against-therest-o.aspx
14 | P a g e
xxiii. Federal Railroad Administration. (n.d.) Freight
Rail Today. Retrieved April 19, 2016, from
http://www.fra.dot.gov/Page/P0362
xxiv. IBISWorld. (2016). IBISWorld. Retreived from
Rail Transportation.
http://clients1.ibisworld.com/reports/us/industry
/majorcompanies.aspx?entid=1133#MP347838
xxv.
Consumer Confidence Index. (2016, March 29).
Consumer Confidence Board Consumer Confidence
Index Improved in March. Retrieved April 19, 2016,
from https://www.conferenceboard.org/data/consumerconfidence.cfm
xxvi. Union Pacific Corporation. (2015). Form 10-K
2015. Retrieved from
http://www.up.com/cs/groups/public/@uprr/@i
nvestor/documents/investordocuments/pdf_upc_1
0k_02062015.pdf
xxvii. U.S. Energy Information Administration. (2016,
April 12). Short-term Energy and Summer Fuels
Outlook - Coal. Retrieved April 19, 2016,
from https://www.eia.gov/forecasts/steo/report/
coal.cfm
xxviii. Union Pacific Corporation. (2016). Form 10-K
2016. Retrieved from
http://www.up.com/cs/groups/public/@uprr/@i
nvestor/documents/investordocuments/pdf_up_1
0k_02062016.pdf
xxix. Prince, S. (2016, January 18). Union Pacific's
Automotive Freight Revenues in 2016 Could Shine.
Retrieved April 19, 2016, from
http://marketrealist.com/2016/01/union-pacificsautomotive-freight-revenues-2016-will-likelyshine/
15 | P a g e
Important Disclaimer
This report was created by students enrolled in the
Security Analysis (FIN:4250) class at the University
of Iowa. The report was originally created to offer
an internal investment recommendation for the
University of Iowa Krause Fund and its advisory
board. The report also provides potential
employers and other interested parties an example
of the students’ skills, knowledge and abilities.
Members of the Krause Fund are not registered
investment advisors, brokers or officially licensed
financial professionals. The investment advice
contained in this report does not represent an offer
or solicitation to buy or sell any of the securities
mentioned. Unless otherwise noted, facts and
figures included in this report are from publicly
available sources. This report is not a complete
compilation of data, and its accuracy is not
guaranteed. From time to time, the University of
Iowa, its faculty, staff, students, or the Krause Fund
may hold a financial interest in the companies
mentioned in this report.
16 | P a g e
Union Pacific Corporation
Revenue Decomposition
Fiscal Years Ending Dec. 31
Freight Revenue
% of Total Revenue
% Change in Freight Revenue
Agricultural (in Millions)
% of Freight Revenue
$
$
% Change in Agriculture Revenue
$
$
$
2,336
11.7%
% Change in Automotive Revenue
3,822
18.5%
$
Construction Products
Paper
Minerals & Consumer
Metals
Lumber
Other
3,093
5.0%
$
3,915 $
3,986
18.1%
18.1%
941
10.4%
957
10.5%
976
10.6%
996
10.8%
1,016
10.9%
1,036
11.0%
1,057
11.1%
3,805
1.7%
-2.0%
$
3,809
0.1%
2.0%
$
3,802
-0.2%
1.8%
1.8%
2.0%
$
3,794
-0.2%
1.8%
2.0%
$
3,787
-0.2%
91.4%
1.6%
1.8%
2.0%
$
3,779
-0.2%
2.0%
$
3,772
-0.2%
2,154 $
10.6%
2,498
-4.0%
2,251 $
10.9%
4.5%
900
9.9%
2,502
0.2%
2,449 $
11.6%
2,554 $
12.0%
2,664 $
12.3%
2,778
12.6%
936
10.2%
973
10.5%
1012
10.8%
1052
11.1%
1095
11.5%
4.3%
$
2,509
0.3%
4.3%
4.0%
4.0%
4.3%
$
2,348 $
11.3%
$
2,516
0.3%
4.3%
4.0%
$
2,524
0.3%
4.3%
4.0%
$
2,531
0.3%
4.3%
4.0%
$
2,538
0.3%
3,543 $
17.4%
3,621 $
3,701 $
3,782 $
3,865 $
3,950 $
4,037
17.6%
17.8%
18.0%
18.1%
18.2%
18.3%
1,098
12.1%
1,118
12.3%
1,138
12.4%
1,158
12.5%
1,179
12.6%
1,200
12.7%
1,222
12.8%
3,227
-1.7%
2.2%
2.2%
1.8%
$
3,239
0.4%
2.2%
1.8%
$
3,252
0.4%
2.2%
1.8%
1.8%
$
3,265
0.4%
2.2%
$
3,278
0.4%
2.2%
1.8%
$
3,291
0.4%
1.8%
$
3,304
0.4%
11%
23%
17%
26%
23%
2,716 $
13.1%
2,488 $
11.8%
2,087 $
-21.6%
2,965 $
14.4%
2,279 $
3.7%
3,237 $
15.9%
10.7%
-8.4%
9.6%
-8.4%
-8.4%
1,768
18.4%
1,459
16.1%
1,350
14.8%
1,269
13.8%
1,192
12.9%
1,121
12.0%
1,054
11.2%
990
10.4%
4,127
18.3%
$
2,334
-0.1%
-17.5%
$
4,400
19.5%
2,218
-5.0%
-8.4%
-7.5%
$
2,197
-0.9%
-8.4%
-6.0%
$
2,141
-2.6%
-8.4%
-6.0%
$
2,086
-2.6%
-6.0%
$
2,033
-2.6%
8.7%
-6.0%
$
1,981
-2.6%
1,912
-6.0%
$
1,931
-2.6%
74%
11%
15%
$
15.1%
3,808 $
18.7%
-13.5%
3,949 $
19.2%
4,095 $
19.7%
4,247 $
20.2%
4,404 $
20.6%
4,567 $
21.1%
4,736
21.5%
1,368
14.2%
1,213
13.4%
1,228
13.5%
1,242
13.5%
1,257
13.6%
1,272
13.6%
1,288
13.6%
1,303
13.6%
3,217
4.0%
-11.3%
$
31%
8%
23%
17%
9%
12%
-2.4%
1.2%
$
3,217
2.5%
3.7%
1.2%
$
3,296
2.5%
3.7%
1.2%
1.2%
$
3,378
2.5%
3.7%
$
3,461
2.5%
3.7%
1.2%
$
3,547
2.5%
3.7%
1.2%
$
3,634
2.5%
35%
9%
21%
15%
10%
10%
4,074 $
4,155 $
4,239 $
4,323 $
4,410 $
4,498 $
4,588
19.9%
20.0%
20.2%
20.4%
20.5%
20.6%
20.7%
20.8%
Carloads (in Thousands)
% of Total Carloads
3,325
36.9%
3,591
37.3%
3,488
38.5%
3,551
39.0%
3,615
39.4%
3,680
39.8%
3,746
40.1%
3,813
40.4%
3,882
40.7%
1.9%
% Change in Total Carloads
% Change in Revenue
International
Domestic
Premium
1,212
1.5%
$
11.4%
0.4%
$
4,489
3,139
3.7%
19.5%
Average Revenue per Carload (in Dollars)
$
3,846 $
18.0%
1.8%
91.8%
1.5%
% of Freight Revenue
% Change in Automotive Revenue
4,030
3,778 $
17.9%
-1.6%
$
10.7%
$
30%
9%
20%
19%
10%
12%
$
3.3%
3,711 $
17.8%
-3.3%
73%
14%
13%
4.3%
$
$
3.8%
$
1,236
13.7%
% Change in Total Carloads
3,282
3,645 $
17.7%
1.8%
92.1%
1.4%
43%
57%
9%
22%
13%
24%
32%
9.4%
Carloads (in Thousands)
% of Total Carloads
3,664
16.2%
3,581 $
17.6%
6.7%
$
1.2%
$
73%
14%
13%
$
-2.1%
92.5%
1.2%
863
9.5%
1,116
11.6%
-9.0%
$
SPRB
CO/UT
Other
Intermodal (in Millions)
3,978
19.2%
2,602
92.8%
1.1%
2.4%
4.7%
1,703
18.9%
% Change in Total Carloads
% Change in Revenue
$
1.7%
Carloads (in Thousands)
% of Total Carloads
Average Revenue per Carload (in Dollars)
2.2%
$
43%
57%
9%
22%
12%
23%
34%
% Change in Automotive Revenue
Industrial Products (in Millions)
% of Freight Revenue
3,176
2,103
9.3%
93.2%
0.9%
25%
41%
34%
3.6%
$
5.9%
$
Soda Ash
Plastics
Fertilizer
Liquid & Dry Chemicals
Petroleum & Others
% Change in Revenue
3,501
16.9%
3.6%
93.5%
-9.6%
-3.3%
$
809
8.4%
1,103
12.2%
% Change in Total Carloads
Average Revenue per Carload (in Dollars)
8.6%
3,881
2015
2016E
2017E
2018E
2019E
2020E
CV2021
20,397 $ 20,587 $ 20,809 $ 21,066 $ 21,357 $ 21,681 $ 22,037
-5.2%
1.3%
8.1%
Carloads (in Thousands)
% of Total Carloads
Coal (in Millions)
% of Freight Revenue
$
43%
57%
% Change in Automotive Revenue
% Change in Revenue
2,659
$
24%
43%
33%
5.8%
$
Auto Parts
Finished Vehicles
Average Revenue per Carload (in Dollars)
2,077
10.0%
3,777
16.7%
$
11.3%
$
781
8.7%
% Change in Total Carloads
Chemicals (in Millions)
% of Freight Revenue
2.8%
94.0%
9.1%
973
10.1%
14.9%
Carloads (in Thousands)
% of Total Carloads
% Change in Revenue
3,746
2014
22,560
15.3%
26%
39%
35%
% Change in Automotive Revenue
Average Revenue per Carload (in Dollars)
$
-2.9%
$
Food/Refrigerated
Whole Grains
Grain Products
Automotive (in Millions)
% of Freight Revenue
3,276
15.8%
$
874
9.7%
% Change in Total Carloads
% Change in Avg. Revenue per Carload
94.2%
5.1%
-0.1%
Carloads (in Thousands)
% of Total Carloads
Average Revenue per Carload (in Dollars)
2013
20,684
-9.2%
8.0%
$
53%
47%
0%
1,250
3.1%
2.0%
-2.9%
$
51%
49%
0%
1,168
-6.6%
2.0%
1.8%
$
1,170
0.2%
2.0%
1.8%
$
1,173
0.2%
2.0%
1.8%
$
1,175
0.2%
2.0%
1.8%
$
1,177
0.2%
2.0%
1.8%
$
1,180
1.8%
$
1,182
1,940 $
2,066
0.2%
0.2%
49%
51%
0%
Other Revenues (i.e. Revenues from
subsidiaries, commuter rail operations, and
accessorial revenues)
$
5.8%
3%
6.0%
12%
6.5%
-1%
6.8%
7%
7.2%
7%
7.5%
7%
7.9%
7%
8.2%
6%
8.6%
6%
Total Revenue
$ 21,963
$ 23,988
$ 21,813
$ 22,095
$ 22,415
$ 22,777
$ 23,179
$ 23,621
$ 24,103
5.0%
9.2%
-9.1%
1.3%
1.4%
1.6%
1.8%
1.9%
2.0%
9,022
9,625
9,062
9,102
9,175
9,257
9,346
9,443
9,549
-0.3%
6.7%
-5.8%
0.4%
0.8%
0.9%
1.0%
1.0%
1.1%
% of Total Revenue
% Change in Other Revenue
% Change in Total Revenue
Total Carloads (in Thousands)
% Change in Total Carloads
1,279
$
1,428
$
1,416 $
1,508 $
1,606 $
1,710 $
1,822 $
Union Pacific Corporation
Income Statement
(In Millions)
Fiscal Year Ending December 31st
Sales
Cost of Goods Sold (COGS) incl. D&A
COGS excluding D&A
Depreciation & Amortization Expense
Gross Income
SG&A Expense
EBIT (Operating Income)
Nonoperating Income - Net
Interest Expense
Unusual Expense - Net
Legal Claim Expense
Unrealized Investment Loss (Gain)
Other Unusual Expense
Pretax Income
Income Taxes
Consolidated Net Income
Net Income
Net Income available to Common
EPS (recurring)
Total Shares Outstanding
Dividends per Share
2013
21,963
13,668
11,891
1,777
8,295
849
7,446
146
517
27
17
0
10
7,048
2,660
4,388
4,388
4,388
2014
23,988
14,311
12,407
1,904
9,677
924
8,753
151
561
0
0
0
0
8,343
3,163
5,180
5,180
5,180
2015
21,813
12,837
10,825
2,012
8,976
924
8,052
226
622
0
0
0
0
7,656
2,884
4,772
4,772
4,772
2016E
22,095
12,653
10,606
2,047
9,442
956
8,486
146
653
0
0
0
0
7,979
3,040
4,939
4,939
4,939
2017E
22,415
12,923
10,759
2,164
9,492
990
8,502
154
686
0
0
0
0
7,971
3,037
4,934
4,934
4,934
2018E
22,777
13,213
10,933
2,281
9,563
1,024
8,539
180
720
0
0
0
0
7,999
3,048
4,951
4,951
4,951
2019E
23,179
13,515
11,126
2,389
9,664
1,060
8,604
161
756
0
0
0
0
8,008
3,051
4,957
4,957
4,957
2020E
23,621
13,836
11,338
2,498
9,785
1,097
8,688
164
794
0
0
0
0
8,057
3,070
4,988
4,988
4,988
CV2021
24,103
14,176
11,569
2,607
9,927
1,136
8,791
165
834
0
0
0
0
8,122
3,094
5,028
5,028
5,028
4.73
912
1.48
5.75
883.37
1.91
5.49
849.21
2.20
5.63
823.81
2.25
5.77
794.91
2.36
5.91
772.56
2.48
6.06
745.15
2.61
6.21
716.41
2.73
6.37
692.83
2.87
Union Pacific Corporation
Balance Sheet
(In Millions)
Fiscal Year Ending December 31st
Assets
Cash & Short-Term Investments
Short-Term Receivables
Inventories
Other Current Assets
Total Current Assets
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
CV2021
1,432.00
1,414.00
653.00
491.00
3,990.00
1,586.00
1,611.00
712.00
770.00
4,679.00
1,391.00
1,356.00
736.00
647.00
4,130.00
1,469.41
1,436.16
684.94
607.61
4,198.12
1,716.15
1,456.98
694.87
616.41
4,484.42
1,531.49
1,480.49
706.08
626.36
4,344.42
1,559.34
1,506.64
718.55
637.42
4,421.96
1,568.41
1,535.38
732.26
649.58
4,485.63
1,486.99
1,566.69
747.19
662.83
4,463.70
Net Property, Plant & Equipment
Property, Plant & Equipment - Gross
Accumulated Depreciation
Total Investments and Advances
Other Assets
Total Assets
43,749.00
59,812.00
16,063.00
1,321.00
671.00
49,731.00
46,272.00
63,214.00
16,942.00
1,390.00
375.00
52,716.00
48,866.00
66,564.00
17,698.00
1,410.00
194.00
54,600.00
50,843.92
70,589.00
19,745.08
1,525.32
106.68
56,674.04
52,705.11
74,614.00
21,908.89
1,581.15
108.39
58,879.07
54,449.58
78,639.00
24,189.42
1,633.49
110.12
60,537.61
55,810.30
82,389.00
26,578.70
1,674.31
111.88
62,018.45
57,062.27
86,139.00
29,076.73
1,711.87
113.67
63,373.44
58,205.49
89,889.00
31,683.51
1,746.16
115.49
64,530.84
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities
705.00
803.00
491.00
1,792.00
3,791.00
462.00
877.00
412.00
2,014.00
3,765.00
Long-Term Debt
Provision for Risks & Charges
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
8,872.00
0.00
14,163.00
1,680.00
28,506.00
11,018.00
0.00
14,680.00
2,064.00
31,527.00
594.00
743.00
434.00
1,435.00
3,206.00
0.25
13,607.00
0.00
15,241.00
1,844.00
33,898.00
1.09%
594.00
828.56
457.17
1,867.90
3,747.63
0.25
13,302.25
0.00
15,924.99
1,822.82
34,797.69
1.86%
1,052.00
840.57
480.03
1,904.06
4,276.65
0.25
13,801.16
0.00
16,608.28
1,849.24
36,535.33
0.96%
566.00
854.13
504.03
1,943.43
3,867.58
0.25
14,290.73
0.00
17,294.00
1,879.08
37,331.40
1.05%
637.00
869.22
529.23
1,985.97
4,021.42
0.25
14,751.53
0.00
17,980.51
1,912.27
38,665.74
1.67%
1,034.00
885.80
555.69
2,031.68
4,507.17
0.25
15,114.78
0.00
18,671.24
1,948.75
40,241.94
1.32%
839.69
903.86
583.48
2,080.52
4,407.55
0.25
15,451.26
0.00
19,367.50
1,988.49
41,214.79
Common Equity
Common Stock/Additional Paid-In Capital
Retained Earnings
Cumulative Translation Adjustment/Unrealized For. Exch. Gain
Other Appropriated Reserves
Treasury Stock
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
21,225.00 21,189.00 20,702.00 21,876.35 22,343.74 23,206.21 23,352.71 23,131.50 23,316.05
5,597.00
7,096.00
7,193.00
7,261.80
7,330.60
7,399.41
7,468.21
7,537.01
7,564.53
25,288.00 27,367.00 30,233.00 33,317.60 36,371.65 39,404.76 42,420.20 45,449.82 48,492.38
-37.00
-49.00
-92.00
0.00
0.00
0.00
0.00
0.00
0.00
-713.00 -1,161.00 -1,103.00 -1,000.00 -1,000.00 -1,000.00 -1,000.00 -1,000.00 -1,000.00
-8,910.00 -12,064.00 -15,529.00 -17,703.06 -20,358.52 -22,597.96 -25,535.69 -28,855.33 -31,740.86
21,225.00 21,189.00 20,702.00 21,876.35 22,343.74 23,206.21 23,352.71 23,131.50 23,316.05
49,731.00 52,716.00 54,600.00 56,674.04 58,879.07 60,537.61 62,018.45 63,373.44 64,530.84
Union Pacific Corporation
Cash Flow Statement
(In Millions)
Fiscal Year Ending December 31st
Operating Activities
Net Income / Starting Line
Depreciation, Depletion & Amortization
Deferred Taxes & Investment Tax Credit
Other Funds
Funds from Operations
Changes in Working Capital
Receivables
Inventories
Accounts Payable
Income Taxes Payable
Other Assets/Liabilities
Net Operating Cash Flow
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1,606.00
1,237.00
235.00
-212.00
2,866.00
14.00
68.00
-64.00
-102.00
0.00
112.00
2,880.00
1,855.00
1,321.00
332.00
-259.00
3,249.00
28.00
47.00
-58.00
30.00
0.00
9.00
3,277.00
2,338.00
1,387.00
547.00
48.00
4,320.00
-250.00
38.00
3.00
-342.00
0.00
51.00
4,070.00
1,898.00
1,444.00
723.00
-538.00
3,527.00
-293.00
-72.00
-25.00
-90.00
0.00
-106.00
3,234.00
3,292.00
1,617.00
986.00
-298.00
5,597.00
276.00
-217.00
-80.00
395.00
0.00
178.00
5,873.00
3,292.00
1,617.00
986.00
-298.00
5,597.00
276.00
-217.00
-80.00
395.00
0.00
178.00
5,873.00
3,943.00
1,760.00
887.00
-160.00
6,430.00
-269.00
70.00
-46.00
-185.00
0.00
-108.00
6,161.00
4,388.00
1,777.00
723.00
-226.00
6,662.00
161.00
-83.00
7.00
163.00
0.00
74.00
6,823.00
5,180.00
1,904.00
895.00
-285.00
7,694.00
-309.00
-197.00
-59.00
217.00
0.00
-270.00
7,385.00
4,772.00
2,012.00
765.00
-28.00
7,521.00
-177.00
255.00
-24.00
-276.00
-85.00
-47.00
7,344.00
Investing Activities
Capital Expenditures
Sale of Fixed Assets & Businesses
Purchase/Sale of Investments
Purchase of Investments
Other Funds
Other Uses
Other Sources
Net Investing Cash Flow
-536.00
669.00
-2,242.00
2,242.00
67.00
0.00
67.00
-2,042.00
-3,117.00
743.00
0.00
0.00
-52.00
-52.00
0.00
-2,426.00
-3,168.00
481.00
0.00
0.00
-77.00
-77.00
0.00
-2,764.00
-2,484.00
287.00
0.00
0.00
22.00
0.00
22.00
-2,175.00
-2,482.00
67.00
0.00
0.00
-73.00
-73.00
0.00
-2,488.00
-3,261.00
193.00
0.00
0.00
-51.00
-51.00
0.00
-3,119.00
-4,012.00
354.00
0.00
0.00
25.00
0.00
25.00
-3,633.00
-3,496.00
98.00
0.00
0.00
-7.00
-7.00
0.00
-3,405.00
-4,346.00
0.00
0.00
0.00
97.00
-41.00
138.00
-4,249.00
-4,650.00
0.00
0.00
0.00
174.00
-77.00
251.00
-4,476.00
-322.00
160.00
0.00
160.00
-657.00
-657.00
0.00
-657.00
35.00
0.00
35.00
-784.00
-364.00
-1,375.00
-1,375.00
0.00
789.00
789.00
1,581.00
-792.00
150.00
0.00
150.00
-800.00
-481.00
-1,609.00
-1,609.00
0.00
1,049.00
1,049.00
2,257.00
-1,208.00
106.00
-31.00
137.00
-935.00
-544.00
0.00
0.00
0.00
-28.00
-28.00
843.00
-871.00
114.00
0.00
114.00
-458.00
-602.00
-1,249.00
-1,249.00
0.00
-518.00
-518.00
894.00
-1,412.00
-12.00
-12.00
0.00
-2,381.00
-837.00
-1,418.00
-1,418.00
0.00
-476.00
-476.00
486.00
-962.00
108.00
0.00
108.00
-2,623.00
-1,146.00
-1,474.00
-1,474.00
0.00
-63.00
-63.00
695.00
-758.00
1.00
0.00
1.00
-2,682.00
-1,333.00
-2,218.00
-2,218.00
0.00
803.00
803.00
1,443.00
-640.00
-301.00
-301.00
0.00
-3,049.00
-1,632.00
-3,225.00
-3,225.00
0.00
1,878.00
1,878.00
2,588.00
-710.00
-3.00
-3.00
0.00
-2,982.00
-2,344.00
-3,465.00
-3,465.00
0.00
2,772.00
2,772.00
3,328.00
-556.00
-26.00
-26.00
0.00
-3,063.00
54.00
51.00
371.00
601.00
-764.00
131.00
-154.00
369.00
154.00
-195.00
Financing Activities
Cash Dividends Paid
Change in Capital Stock
Repurchase of Common & Preferred Stk.
Sale of Common & Preferred Stock
Issuance/Reduction of Debt, Net
Change in Long-Term Debt
Issuance of Long-Term Debt
Reduction in Long-Term Debt
Other Funds
Other Uses
Other Sources
Net Financing Cash Flow
Net Change in Cash
Union Pacific Corporation
Cash Flow Statement
(In Millions)
Fiscal Year Ending December 31st
Operating Activities
Net Income / Starting Line
Depreciation, Depletion & Amortization
Deferred Taxes & Investment Tax Credit
Changes in Working Capital
Receivables
Inventories
Accounts Payable
Income Taxes Payable
Other Assets
Other Liabilities
Net Operating Cash Flow
2016E
2017E
2018E
2019E
2020E
CV2021
4,938.91
2,047.08
683.99
551.92
-80.16
51.06
85.56
23.17
39.39
432.90
8,221.89
4,933.90
2,163.81
683.29
31.47
-20.82
-9.93
12.01
22.86
-8.81
36.15
7,812.47
4,951.44
2,280.53
685.72
32.26
-23.51
-11.21
13.56
24.00
-9.95
39.37
7,949.96
4,957.13
2,389.28
686.51
33.15
-26.15
-12.47
15.09
25.20
-11.06
42.55
8,066.07
4,987.58
2,498.03
690.73
34.14
-28.74
-13.71
16.58
26.46
-12.16
45.70
8,210.48
5,027.53
2,606.78
696.26
35.21
-31.30
-14.93
18.06
27.78
-13.24
48.85
8,365.78
Investing Activities
Capital Expenditures
Long-Term Investments
Other Assets
Net Investing Cash Flow
-4,025.00 -4,025.00 -4,025.00 -3,750.00 -3,750.00 -3,750.00
-115.32
-55.84
-52.33
-40.82
-37.56
-34.30
87.32
-1.71
-1.73
-1.76
-1.79
-1.82
-4,053.00 -4,082.54 -4,079.07 -3,792.58 -3,789.35 -3,786.12
Financing Activities
Cash Dividends Paid
Change in Capital Stock
Repurchase of Common & Preferred Stk.
Common Stock/Additional Paid-In Capital
Other Liabilities
Other Income
Change in Long-Term Debt
Current Portion of Short and Long Term Debt
Net Financing Cash Flow
-1,854.31
-2,105.26
-2,174.06
68.80
-21.18
195.00
-304.75
0.00
-4,090.49
-1,879.85
-2,586.66
-2,655.46
68.80
26.42
0.00
498.91
458.00
-3,483.18
-1,918.33
-2,170.64
-2,239.44
68.80
29.84
0.00
489.57
-486.00
-4,055.55
-1,941.70
-2,868.93
-2,937.73
68.80
33.19
0.00
460.80
71.00
-4,245.64
-1,957.96
-3,250.84
-3,319.64
68.80
36.48
0.00
363.25
397.00
-4,412.07
-1,984.97
-2,858.01
-2,885.53
27.52
39.73
0.00
336.48
-194.31
-4,661.08
78.41
246.75
-184.66
27.85
9.06
-81.41
1,391.00
1,469.41
1,469.41
1,716.15
1,716.15
1,531.49
1,531.49
1,559.34
1,559.34
1,568.41
1,568.41
1,486.99
Net Change in Cash
Beginning Cash
Ending Cash
Union Pacific Corporation
Common Size Income Statement
(% of Sales)
Fiscal Year Ending December 31st
Sales
Cost of Goods Sold (COGS)
Depreciation & Amortization
Gross Income
SG&A Expense
Other Operating Expense
EBIT (Operating Income)
Nonoperating Income - Net
Interest Expense
Unusual Expense - Net
Pretax Income
Income Taxes
Consolidated Net Income
Net Income
2013
100%
54.14%
8.09%
37.77%
3.87%
0.00%
33.90%
0.66%
2.35%
0.12%
32.09%
12.11%
19.98%
19.98%
2014
100%
51.72%
7.94%
40.34%
3.85%
0.00%
36.49%
0.63%
2.34%
0.00%
34.78%
13.19%
21.59%
21.59%
2015
100%
49.63%
9.22%
41.15%
4.24%
0.00%
36.91%
1.04%
2.85%
0.00%
35.10%
13.22%
21.88%
21.88%
2016E
100%
48.00%
9.26%
42.74%
4.33%
0.00%
38.41%
0.66%
2.96%
0.00%
36.11%
13.76%
22.35%
22.35%
2017E
100%
48.00%
9.65%
42.35%
4.42%
0.00%
37.93%
0.69%
3.06%
0.00%
35.56%
13.55%
22.01%
22.01%
2018E
100%
48.00%
10.01%
41.99%
4.50%
0.00%
37.49%
0.79%
3.16%
0.00%
35.12%
13.38%
21.74%
21.74%
2019E
100%
48.00%
10.31%
41.69%
4.57%
0.00%
37.12%
0.69%
3.26%
0.00%
34.55%
13.16%
21.39%
21.39%
CV2021
2020E
100%
100%
48.00%
48.00%
10.58%
10.82%
41.42% 41.18%
4.65%
4.71%
0.00%
0.00%
36.78% 36.47%
0.69%
0.68%
3.36%
3.46%
0.00%
0.00%
34.11% 33.70%
13.00%
12.84%
21.11%
20.86%
21.11% 20.86%
Union Pacific Corporation
Common Size Balance Sheet
(% of Sales)
Fiscal Year Ending December 31st
Assets
Cash & Short-Term Investments
Short-Term Receivables
Inventories
Other Current Assets
Total Current Assets
2013
6.52%
6.44%
2.97%
2.24%
18.17%
6.61%
6.72%
2.97%
3.21%
19.51%
Net Property, Plant & Equipment
Total Investments and Advances
Other Assets
Total Assets
199.19%
6.01%
3.06%
226.43%
192.90%
5.79%
1.56%
219.76%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Other Current Liabilities
Total Current Liabilities
3.21%
3.66%
2.24%
8.16%
17.26%
1.93%
3.66%
1.72%
8.40%
15.70%
Long-Term Debt
Provision for Risks & Charges
Deferred Tax Liabilities
Other Liabilities
Total Liabilities
40.40%
0.00%
64.49%
7.65%
129.79%
45.93%
0.00%
61.20%
8.60%
131.43%
62.38%
60.21%
61.57%
62.74%
63.64%
63.99%
64.11%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
69.87%
72.08%
74.09%
75.93%
77.57%
79.04%
80.35%
8.45%
8.25%
8.25%
8.25%
8.25%
8.25%
8.25%
155.40% 157.49% 162.99% 163.90% 166.81% 170.36% 171.00%
Common Equity
Total Shareholders' Equity
Total Liabilities & Shareholders' Equity
96.64%
96.64%
226.43%
88.33%
88.33%
219.76%
97.93%
96.74%
94.91%
99.01%
99.68% 101.89% 100.75%
94.91% 99.01% 99.68% 101.89% 100.75% 97.93% 96.74%
250.31% 256.50% 262.68% 265.79% 267.56% 268.29% 267.73%
2014
2015
6.38%
6.22%
3.37%
2.97%
18.93%
2016E
6.65%
6.50%
3.10%
2.75%
19.00%
2017E
7.66%
6.50%
3.10%
2.75%
20.01%
2018E
6.72%
6.50%
3.10%
2.75%
19.07%
2019E
6.73%
6.50%
3.10%
2.75%
19.08%
2020E
6.64%
6.50%
3.10%
2.75%
18.99%
CV2021
6.17%
6.50%
3.10%
2.75%
18.52%
224.02% 230.12% 235.13% 239.06% 240.78% 241.57% 241.49%
6.46%
6.90%
7.05%
7.17%
7.22%
7.25%
7.24%
0.89%
0.48%
0.48%
0.48%
0.48%
0.48%
0.48%
250.31% 256.50% 262.68% 265.79% 267.56% 268.29% 267.73%
2.72%
3.41%
1.99%
6.58%
14.70%
2.69%
3.75%
2.07%
8.45%
16.96%
4.69%
3.75%
2.14%
8.49%
19.08%
2.48%
3.75%
2.21%
8.53%
16.98%
2.75%
3.75%
2.28%
8.57%
17.35%
4.38%
3.75%
2.35%
8.60%
19.08%
3.48%
3.75%
2.42%
8.63%
18.29%
Union Pacific Corporation (UNP)
Weighted Average Cost of Capital (WACC) Estimation
Beta:
Risk Free Rate:
Market Risk Premium:
Cost of Equity =
1.111
2.57%
4.80%
7.90%
Cost of Debt:
Marginal Tax Rate:
After-Tax Cost of Debt
3.90%
38.10%
2.41%
Cost of Equity:
Weight of Equity:
Cost of Debt:
Weight of Debt:
7.90%
80.39%
2.41%
19.61%
WACC =
6.82%
Stock Price:
Shares Outstanding:
MV of Equity:
$82.24
849,210,000
$ 69,839,030,400
Weight of Equity
80.39%
ST Debt & Current Portion of LTD:
Long-Term Debt:
PV of Operating Leases
MV of Debt:
$594,000,000
$13,607,000,000
$2,840,553,260
$ 17,041,553,260
Weight of Debt
19.61%
MV of Equity:
MV of Debt:
MV of Firm
$ 69,839,030,400
$ 17,041,553,260
$ 86,880,583,660
100.00%
Union Pacific Corporation
Value Driver Estimation
(in Millions)
Fiscal Years Ending Dec. 31
NOPLAT COMPUTATION
Net Sales
Less: Cost of Sales
Less: Depreciation Less: SG & A Expense
Plus: Implied Interest on the PV of Operating Leases
EBITA
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
CV2021
21,963.00
11,891.00
1,777.00
849.00
129.86
7,575.86
23,988.00
12,407.00
1,904.00
924.00
120.50
8,873.50
21,813.00
10,825.00
2,012.00
924.00
110.78
8,162.78
22,094.84
10,605.52
2,047.08
956.34
115.27
8,601.16
22,415.08
10,759.24
2,163.81
989.81
119.49
8,621.71
22,776.78
10,932.86
2,280.53
1024.46
123.44
8,662.38
23,179.07
11,125.95
2,389.28
1060.31
126.52
8,730.05
23,621.26
11,338.21
2,498.03
1097.42
129.36
8,816.97
24,102.86
11,569.37
2,606.78
1135.83
131.95
8,922.83
2,660.00
196.98
55.63
10.23
10.29
2,821.87
3,163.00
213.74
57.53
0.00
0.00
3,319.21
2,884.00
236.98
86.11
0.00
0.00
3,034.88
3,039.94
248.83
55.65
0.00
0.00
3,233.13
3,036.86
261.27
58.78
0.00
0.00
3,239.35
3,047.66
274.34
68.65
0.00
0.00
3,253.34
3,051.16
288.05
61.27
0.00
0.00
3,277.94
3,069.90
302.46
62.38
0.00
0.00
3,309.98
3,094.49
317.58
62.74
0.00
0.00
3,349.32
14,163.00
268.00
0.00
13,895.00
14,680.00
277.00
0.00
14,403.00
15,241.00
0.00
0.00
15,241.00
15,924.99
0.00
0.00
15,924.99
16,608.28
0.00
0.00
16,608.28
17,294.00
0.00
0.00
17,294.00
17,980.51
0.00
0.00
17,980.51
18,671.24
0.00
0.00
18,671.24
19,367.50
0.00
0.00
19,367.50
Net Change in Deferred Tax Liabilities
1,050.00
508.00
838.00
683.99
683.29
685.72
686.51
690.73
696.26
NOPLAT
5,803.98
6,062.29
5,965.91
6,052.02
6,065.66
6,094.77
6,138.62
6,197.72
6,269.77
INVESTED CAPITAL
Operating Current Assets
"Normal" Cash
Accounts Receivable, Net
Inventories
Other Operating Current Assets
Operating Current Assets
71.60
1,414.00
653.00
223.00
2,361.60
79.30
1,611.00
712.00
493.00
2,895.30
69.55
1,356.00
736.00
647.00
2,808.55
73.47
1,436.16
684.94
607.61
2,802.18
85.81
1,456.98
694.87
616.41
2,854.07
76.57
1,480.49
706.08
626.36
2,889.51
77.97
1,506.64
718.55
637.42
2,940.58
78.42
1,535.38
732.26
649.58
2,995.65
74.35
1,566.69
747.19
662.83
3,051.05
Operating Current Liabilities
Accounts Payable
Taxes Payable
Other Current Liabilities
Operating Current Liabilites
803.00
491.00
1,792.00
3,086.00
877.00
412.00
2,014.00
3,303.00
743.00
434.00
1,435.00
2,612.00
828.56
457.17
1,867.90
3,153.63
840.57
480.03
1,904.06
3,224.65
854.13
504.03
1,943.43
3,301.58
869.22
529.23
1,985.97
3,384.42
885.80
555.69
2,031.68
3,473.17
903.86
583.48
2,080.52
3,567.86
Income Tax Provision
Plus: Tax Shield on Interest Expense
Less: Tax Non-Operating Income
Plus: Tax on Unusual Expenses
Plus: Tax Shield on Non-Operating Losses
Total Adjusted Taxes
Deferred Tax Liabilities
Deferred Tax Current Assets
Deferred Tax Long-Term Assets
Net Deferred Tax Liability
Net Operating Working Capital
Plus: Net PPE
Plus: PV of Operating Leases
Plus: Tangible Other Assets
-724.4
-407.7
196.55
-351.45
-370.58
-412.08
-443.84
-477.52
-516.81
43,749.00
3,329.64
671.00
46,272.00
3,089.62
375.00
48,866.00
2,840.55
105.00
50,843.92
2,955.53
106.68
52,705.11
3,063.72
108.39
54,449.58
3,165.12
110.12
55,810.30
3,244.22
111.88
57,062.27
3,317.00
113.67
58,205.49
3,383.45
115.49
47,025.24
49,328.92
52,008.10
53,554.68
55,506.64
57,312.75
58,722.57
60,015.42
61,187.63
VALUE DRIVERS
NOPLAT
BEG. INVESTED CAPITAL
ROIC
5,803.98
45,132.83
12.86%
6,062.29
47,025.24
12.89%
5,965.91
49,328.92
12.09%
6,052.02
52,008.10
11.64%
6,065.66
53,554.68
11.33%
6,094.77
55,506.64
10.98%
6,138.62
57,312.75
10.71%
6,197.72
58,722.57
10.55%
6,269.77
60,015.42
10.45%
BEG. INVESTED CAPITAL
ROIC
WACC
EP
45,132.83
12.86%
6.82%
2723.85
47,025.24
12.89%
6.82%
2853.01
49,328.92
12.09%
6.82%
2599.41
52,008.10
11.64%
6.82%
2502.68
53,554.68
11.33%
6.82%
2410.77
55,506.64
10.98%
6.82%
2306.67
57,312.75
10.71%
6.82%
2227.26
58,722.57
10.55%
6.82%
2190.14
60,015.42
10.45%
6.82%
2173.96
NOPLAT
BEG. INVESTED CAPITAL
ENDING INVESTED CAPITAL
FCF
5,803.98
45,132.83
47,025.24
3,911.58
6,062.29
47,025.24
49,328.92
3,758.61
5,965.91
49,328.92
52,008.10
3,286.72
6,052.02
52,008.10
53,554.68
4,505.44
6,065.66
53,554.68
55,506.64
4,113.70
6,094.77
55,506.64
57,312.75
4,288.66
6,138.62
57,312.75
58,722.57
4,728.80
6,197.72
58,722.57
60,015.42
4,904.87
6,269.77
60,015.42
61,187.63
5,097.56
Invested Capital
Union Pacific Corporation (UNP)
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
1.95%
10.45%
6.82%
7.90%
Fiscal Years Ending Dec. 31
5% of Sales
1090.65
2015
2016E
2017E
2018E
2019E
2020E
6.82%
3,286.72
4,505.44
4,113.70
4,288.66
4,728.80
4,904.87
1
4,217.61
2
3,604.87
3
3,518.10
4
3,631.33
104,642.35
6,269.77
5
5
3,525.91
75,223.12
2,502.68
1
2,410.77
2
2,306.67
3
2,227.26
4
2,190.14
5
44,626.93
5
2,342.80
2,112.58
1,892.22
1,710.35
1,574.40
32,080.48
CV2021
DCF Model
WACC
FCF to Discount
NOPLAT
Period to Discount
PV of FCF
Value of Operating Assets
Plus: Excess Cash
Value of the Firm
Less: Short Term Debt
Less: Long-Term Debt
Less: PV of Operating Leases
Less: PV of ESOP
Less: Underfunded Pension
Value of Equity
Number of Shares Outstanding:
Intrinsic Value
93,720.94
300.35
94,021.29
594.00
13,607.00
2,840.55
72.19
414.00
76,493.54
849.21
$
90.08
Fractional Period of Year
Adjusted Stock Price
$
0.301
91.47
EP Model
WACC
EP to Discount
Period to Discount
Beginning Invested Capital
PV of Cash Flows
6.82%
2,599.41
52,008.10
Value of Operating Assets
Plus: Excess Cash
Value of Firm
Less: Short Term Debt
Less: Long-Term Debt
Less: PV of Operating Leases
Less: PV of ESOP
Less: Underfunded Pension
Value of Equity
Number of Shares Outstanding
Intrinsic Value
Fractional Period of Year
Adjusted Stock Price
93,720.94
300.35
94,021.29
594.00
13,607.00
2,840.55
72.19
414.00
76,493.54
849.21
90.08
$
0.301
91.47
Union Pacific Corporation (UNP)
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
2016E
EPS
5.63
Key Assumptions
CV EPS growth
CV ROE
Cost of Equity
2017E
5.77
2018E
5.91
2019E
6.06
2020E
6.21
CV2021
6.37
2.25%
21.56%
7.90%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Periods
Discounted Cash Flows
15.85
6.37
100.91
2.25
1
2.09
Intrinsic Value
$
78.88
Fractional Period of Year
Adjusted Stock Price
$
0.301
80.10
2.36
2
2.03
2.48
3
1.98
2.61
4
1.92
2.73
5
1.87
5
69.00
Union Pacific Corporation
Relative Valuation Models
Ticker
CSX
CP
CNI
KSU
NSC
Company
CSX Corporation
Canadian Pacific Railway
Canadian National Railway
Kansas City Southern
Norfolk Southern Corporation
UNP
Union Pacific Corporation
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
PEG Ratio (EPS16)
PEG Ratio (EPS17)
Price
$25.98
$146.98
$63.56
$91.55
$81.78
EPS
2016
$2.00
$6.34
$3.31
$4.40
$5.10
EPS
2017E
$1.84
$11.03
$4.66
$4.56
$5.34
Average
$82.24
$5.49
$5.63
$ 101.25
$ 86.07
$ 109.57
$ 102.11
P/E 16
13.0
23.2
19.2
20.8
16.0
18.4
P/E 17
14.1
13.3
13.6
20.1
15.3
15.3
15.0
14.6
Est. 5yr
EPS gr.
3.0
13.5
9.4
8.4
10.1
8.21
PEG 16
4.33
1.71
2.05
2.48
1.59
2.4
1.8
PEG 17
4.71
0.98
1.46
2.39
1.51
2.2
1.8
Union Pacific Corporation
Key Management Ratios
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
CV2021
1.05
0.75
199.00
1.24
0.85
914.00
1.29
0.86
924.00
1.12
0.78
450.49
1.05
0.74
207.77
1.12
0.78
476.84
1.10
0.76
400.54
1.00
0.69
-21.54
1.01
0.69
56.15
Liquidity Ratios
Current Ratio
Quick Ratio
Net Working Capital
(Current Assets/Current Liabilites)
(Cash + A/R)/Current Liabilities
(Current Assets - Current Liab.)
Activity or Asset-Management Ratios
Receivables Turnover
Total Asset Turnover
Fixed Asset Turnover
Net Income/(Average A/R)
Total Revenues/(Average Total Assets)
Total Revenues/(Average Net PP&E)
3.20
0.45
0.51
3.42
0.47
0.53
3.22
0.41
0.46
3.54
0.40
0.44
3.41
0.39
0.43
3.37
0.38
0.43
3.32
0.38
0.42
3.28
0.38
0.42
3.24
0.38
0.42
Financial Leverage Ratios
Debt-to-Equity Ratio
Equity Ratio
Debt Ratio
Capitalization Ratio
(ST Debt + LT Debt)/Total Equity
Total Equity/Total Assets
Total Liabilities/Total Assets
LT Debt/(LT Debt + SH Equity)
0.45
0.43
0.57
0.29
0.54
0.40
0.60
0.34
0.69
0.38
0.62
0.40
0.64
0.39
0.61
0.38
0.66
0.38
0.62
0.38
0.64
0.38
0.62
0.38
0.66
0.38
0.62
0.39
0.70
0.37
0.63
0.40
0.70
0.36
0.64
0.40
Profitability Ratios
Net Profit Margin
ROA
ROE
Operating Margin
Net Income/Revenue
Net Income/Average Total Assets
Net Income/SH Equity
Operating Income/Net Sales
19.98%
9.06%
20.67%
33.90%
21.59%
10.11%
24.45%
36.49%
21.88%
8.89%
23.05%
36.91%
22.35%
8.88%
22.58%
38.41%
22.01%
8.54%
22.08%
37.93%
21.74%
8.29%
21.34%
37.49%
21.39%
8.09%
21.23%
37.12%
21.11%
7.96%
21.56%
36.78%
20.86%
7.86%
21.56%
36.47%
Payout Policy Ratios
Dividend Payout Ratio
Total Payout Ratio
Dividends per Share/Earnings per Share
(Dividends + Repurchases)/Net Income
31.29%
80.93%
33.22%
93.76%
40.07%
121.73%
37.54%
80.17%
38.10%
90.53%
38.74%
82.58%
39.17%
97.04%
39.26%
104.44%
39.48%
96.33%
$
Market
Risk
Premium
$
WACC
Beta
1.111
102.76
96.84
91.47
86.56
82.07
91.47
4.30%
4.55%
4.80%
5.05%
5.30%
0.911
125.56
118.74
112.52
106.84
101.62
1.011
113.19
106.85
101.09
95.82
91.00
1.211
93.83
88.29
83.25
78.67
74.47
1.311
86.11
80.89
76.16
71.85
67.91
91.47
5.99%
6.49%
6.99%
7.49%
7.99%
1.45%
108.39
95.29
84.57
75.63
68.06
CV Growth of NOPLAT
1.70%
1.95%
2.20%
105.64
105.64
108.39
93.35
93.35
95.29
83.19
83.19
84.57
74.65
74.65
75.63
67.38
67.38
68.06
2.45%
114.92
99.83
87.74
77.84
69.58
SG&A as
% of
Sales
Risk Free
Rate
$ 91.47
3.00%
3.25%
3.50%
3.75%
4.00%
7.12%
91.35
91.30
91.26
91.22
91.17
$ 91.47
2.07%
2.32%
2.57%
2.82%
3.07%
47.00%
101.74
96.49
91.67
87.24
83.14
Cost of Equity
7.62%
8.12%
91.48
91.61
91.44
91.57
91.39
91.52
91.35
91.48
91.31
91.44
8.62%
91.74
91.70
91.65
91.61
91.57
9.12%
91.87
91.83
91.78
91.74
91.70
COGS as % of Sales
47.50%
48.00%
48.50%
101.63
101.53
101.42
96.38
96.28
96.17
91.57
91.47
91.36
87.13
87.03
86.93
83.04
82.94
82.84
49.00%
101.31
96.07
91.26
86.83
82.74
Present Value of Operating Lease Obligations (2015)
Present Value of Operating Lease Obligations (2014)
Operating
Leases
491
446
371
339
282
1501
3430
589
2841
Fiscal Years Ending 2015
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
3.90%
5.3
Lease
Commitment
491
446
371
339
282
282
PV Lease
Payment
472.6
413.1
330.8
290.9
232.9
1100.3
2840.6
Present Value of Operating Lease Obligations (2012)
Capitalization of Operating Leases
3.90%
6.3
Lease
Commitment
525
466
410
375
339
339
PV Lease
Payment
505.3
431.7
365.5
321.8
280.0
1531.4
3435.7
Present Value of Operating Lease Obligations (2009)
Capitalization of Operating Leases
3.90%
15.1
Lease
Commitment
576
570
488
425
352
352
PV Lease
Payment
554.4
528.0
435.1
364.7
290.7
3269.6
5442.4
Present Value of Operating Lease Obligations (2006)
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
624
546
498
456
419
419
3.90%
6.9
Lease
Commitment
525
489
415
372
347
347
PV Lease
Payment
505.3
453.0
370.0
319.2
286.6
1696.0
3630.1
3.90%
8.2
Lease
Commitment
657
614
580
465
389
389
PV Lease
Payment
632.3
568.8
517.1
399.0
321.3
2226.6
4665.1
Operating
Leases
615
517
450
405
359
2588
4934
985
3949
Fiscal Years Ending 2005
2006
2007
2008
2009
2010
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
3.90%
7.0
PV Lease
Payment
600.6
505.8
444.0
391.3
346.0
2072.9
4360.6
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
615
517
450
405
359
359
PV Lease
Payment
492.8
441.9
390.5
343.2
274.2
1387.1
3329.6
Operating
Leases
613
526
461
382
340
2599
4921
998
3923
Fiscal Years Ending 2010
2011
2012
2013
2014
2015
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
3.90%
7.6
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
613
526
461
382
340
340
PV Lease
Payment
590.0
487.3
411.0
327.8
280.8
1825.7
3922.6
Operating
Leases
639
600
554
522
417
3289
6021
1264
4757
Fiscal Years Ending 2007
2008
2009
2010
2011
2012
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
512
477
438
400
332
332
Present Value of Operating Lease Obligations (2007)
Operating
Leases
657
614
580
465
389
3204
5909
1244
4665
Fiscal Years Ending 2008
2009
2010
2011
2012
2013
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
3.90%
5.7
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Present Value of Operating Lease Obligations (2010)
Operating
Leases
525
489
415
372
347
2380
4528
898
3630
Fiscal Years Ending 2011
2012
2013
2014
2015
2016
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Present Value of Operating Lease Obligations (2005)
Operating
Leases
624
546
498
456
419
2914
5457
1096
4361
Fiscal Years Ending 2006
2007
2008
2009
2010
2011
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
PV Lease
Payment
488.9
448.3
382.5
305.5
266.8
1197.6
3089.6
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
508
484
429
356
323
323
Present Value of Operating Lease Obligations (2008)
Operating
Leases
576
570
488
425
352
5312
7723
2281
5442
Fiscal Years Ending 2009
2010
2011
2012
2013
2014
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
3.90%
5.0
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Operating
Leases
512
477
438
400
332
1907
4066
736
3330
Fiscal Years Ending 2013
2014
2015
2016
2017
2018
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Present Value of Operating Lease Obligations (2011)
Operating
Leases
525
466
410
375
339
2126
4241
805
3436
Fiscal Years Ending 2012
2013
2014
2015
2016
2017
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Fiscal Years Ending 2014
2015
2016
2017
2018
2019
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Present Value of Operating Lease Obligations (2013)
Operating
Leases
508
484
429
356
323
1625
3725
635
3090
3.90%
7.2
PV Lease
Payment
591.9
478.9
401.2
347.5
296.5
1832.5
3948.5
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
639
600
554
522
417
417
3.90%
7.9
PV Lease
Payment
615.0
555.8
493.9
447.9
344.4
2300.2
4757.3
FORECASTED PV OF OPERATING LEASES
2016
2955.53
2017
3063.72
2018
3165.12
2019
3244.22
2020
3317.00
2021
3383.45
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares):
Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
5,571,000
5.40
1,031,667
$
66.69
7.90%
$82.24
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
2016E
2017E
2018E
2019E
2020E
CV2021
1,031,667
1,031,667
1,031,667
1,031,667
1,031,667
412,667
$
66.69 $
66.69 $
66.69 $
66.69 $
66.69 $
66.69
68,801,850
68,801,850
68,801,850
68,801,850
68,801,850
27,520,740
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
2,174,060,000 2,655,459,000 2,239,437,090 2,937,734,292 3,319,639,750 2,885,533,013
$
82.24 $
88.74 $
95.75 $
103.31 $
111.48 $
120.28
26,435,554
29,924,840
23,388,719
28,435,143
29,778,937
23,989,413
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
849,210,000
1,031,667
26,435,554
823,806,112
823,806,112
1,031,667
29,924,840
794,912,939
794,912,939
1,031,667
23,388,719
772,555,887
772,555,887
1,031,667
28,435,143
745,152,410
745,152,410
1,031,667
29,778,937
716,405,140
716,405,140
412,667
23,989,413
692,828,393
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Number
of Shares
5,571,000
Total
5,571,000 $
UNP
$82.24
2.15%
2.68%
8.26%
Average
Exercise
Price
66.69
66.69
Average
Remaining
Life (yrs)
5.40 $
B-S
Option
Price
12.96 $
Value
of Options
Granted
72,193,204
5.40 $
22.37 $
72,193,204