Union Pacific Corporation owns Union Pacific Railroad, the largest railroad in the United States in both track miles and total revenues, with nearly 32,236 route miles serving the western two-thirds of the United States. Union Pacific’s railroad revenue for 2019 comprised of: 31% Premium, 22% Agricultural Products, 29% Industrial, and 18% Energy. Additionally, about 10% of UNP’s sales came from Mexico. With the expected increase in economic activities post pandemic, need for premium, agricultural, industrial, and energy goods will increase, and this should increase UNP’s revenue. This week, I fundamentally analyze Union Pacific’s stock. I review UNP’s operating segments, look at its key ratios, derive the intrinsic value using Discounted Cash Flow (DCF) analysis, and calculate the expected rate of return from this investment. Since this is a long video, please feel free to use the time stamps in the video if you only wish to watch certain topics.
I review various key ratios such as Revenue, Net Income, Shares outstanding, Dividends, Payout Ratio, Free Cash Flows (FCF), Financial Leverage, Current Ratio, Debt to Equity Ratio, Return on Equity (ROE), Days Sales Outstanding (DSO), Days Inventory, Payable Period, Cash Conversion Cycle, Inventory Turnover, etc.
After taking into account 2020’s free cash flow of $5,613 million figure, a 6% growth rate of FCF (growth for the next 10 years), 10% discount rate, 4% long term growth rate (growth from 10 year mark to perpetuity), 679 million shares outstanding, and $25,660 million of long term debt, the DCF analysis yields us an intrinsic value of $125.36 per share. If we drop the discount rate from 10% to 8%, the intrinsic value comes to $211.89 per share. Using the current stock price of about $211 per share, and taking into the shares outstanding and future projects of free cash flows, we get the annual expected rate of return to be 3.3% if we hold this security through 2060.
0:36 Operating Segments
2:31 Key Ratios Analysis
10:47 Discounted Cash Flow Analysis / Intrinsic Value
12:46 Expected Rate of Return Calculation
13:43 Summary / Conclusion
Union Pacific’s Website: here
Morningstar Key Ratios Link: here.
Useful Resources here.
Union Pacific Corporation owns Union Pacific Railroad, the largest railroad in the United States in both track miles and total revenues, with nearly 32,236 route miles serving the western two-thirds of the United States. Union Pacific operates 8,300 locomotives over 32,200 miles routes in 23 U.S. states west of Chicago and New Orleans.
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