Remember when I told you that I would be able to pick up shares of Union Pacific (UNP) at a cheaper price because I believed that it was coming in? Well, it has pulled back 1.81% since that time, as I predicted that $149.15 would act as support (it hit $149.40 and bounced up immediately on higher than average volume). The stock currently stands at $153.76 and is holding the support level. Union Pacific Corporation owns transportation companies, of which its principal operating company, Union Pacific Railroad Company, connects 23 states in the western 66% of the United States. On October 17, 2013, the company reported third-quarter earnings of $2.48 per share, which beat the consensus of analysts' estimates by $0.01. In the past year, the company's stock is up 24.02% excluding dividends (up 26.04% including dividends), and is losing to the S&P 500 (SPY), which has gained 25.01% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the services sector of my dividend growth portfolio.
The company currently trades at a trailing 12-month P/E ratio of 16.95, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.36 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $10.71 per share and I'd consider the stock inexpensive until about $161. The 1-year PEG ratio (1.19), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 14.22%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 14.22%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 13.7%. Below is a comparison table of the fundamentals metrics for the company from the time I wrote the last article to what it is right now.
EPS Next YR ($)
My Target Price ($)
EPS next YR (%)
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.06% with a payout ratio of 35% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.8%, 20.9% and 15.1%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.06% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 7 years at a 5-year dividend growth rate of 29.8%. Below is a comparison table of the financials metrics for the company from the last time I wrote the article until now.
Payout TTM (%)
Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around in middle ground territory with a value of 49.31 but with upward trajectory, which is a bullish pattern. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is ascending and about to cross above the red line with the divergence bars increasing in height to the upside, indicating the stock has upward momentum. As for the stock price itself ($153.76), I'm looking at $156.57 to act as resistance and $152.90 to act as support for a risk/reward ratio, which plays out to be -0.56% to 1.83%.
- On 17Oct13 the company reported third-quarter earnings of $2.48 on revenue of $5.57 billion versus expectations of $2.47 and $5.71 billion.
- Union Pacific's rival CSX (CSX) reported third quarter results on 15Oct13 where profit rose 1.8% on higher overall volume and pricing gains which offset weakness in the coal market. This reported completely contradicted what Union Pacific had reported earlier in October.
Prior to the warning on earnings Union Pacific issued in early October things were robust for the first nine months of this year. Things got weak suddenly and the company announced the poor quarter which was a big contrast to what rivals CSX and Norfolk Southern (NSC) announced. This is a story of CSX and Norfolk performing better than Union Pacific on the quarter, but I don't think Union Pacific has lost its ways. Even though earnings estimates for next year have been reduced, Union Pacific is still inexpensively valued based on future earnings. Financially, the dividend payout ratio is very low based on trailing 12-month earnings. I don't doubt management will be able to continue to increase the dividend going forward and at double digit clips. Based on future earnings the dividend payout ratio goes down to around 29.5% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some upward pressure in the immediate future. The stock is inexpensive on future valuation, has great dividend growth potential, and great earnings growth potential. It's because of these reasons I will buy a position here right now.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!