Union Pacific Corporation (UNP) is a railroad company that provides freight transportation services throughout the United States. The Omaha, Nebraska company, has a market cap of $79.1 billion and its stock price is around $172.
Union Pacific was founded in 1862, it is the largest and in my opinion, the most prestigious U.S. railway. This was one of the first stocks that I ever bought, back at a time when all I had been told about stock investing was if you bought industry-leading stocks that paid dividends, over time they would pay off handsomely. While some might think of that kind of investing strategy as being out of touch, Union Pacific is proof that the strategy still works. Over the years, many new strategies have been touted by analysts and self-proclaimed investment gurus, some have worked better than others, but in the case of Union Pacific the old buy quality and hold on strategy turned out to be a winner. I only own the original few shares of the stock that I first purchased many years ago but on the occasions when I check the value of the stock I wish I had continued to buy shares of Union Pacific.
On January 23, Union Pacific reported record fourth-quarter earnings which showed why its stock price just continues to keep moving higher. Revenues totaled $5.63 billion, up 7.2% from revenues of $5.25 billion last year and beating analyst estimates of $5.57 billion. Net income was $1.17 billion or $2.55 per share, up 13% from $1.04 billion in 2012 and handily beating analyst estimates of $2.49 per share. For the full year of 2013, the company reported revenues of $21.96 billion, up 5% from $20.92 and net income of $4.4 billion, up 11% from $3.9 billion in 2012.
In the fourth quarter Union Pacific's revenues increased in each of its main areas of shipping except for coal.
- Revenues from shipping automobiles increased by 17% to $544 million.
- Revenues from shipping industrial product increased by 14% to $954 million.
- Revenues from shipping agricultural products increased by 19% to $937 million.
- Revenues from shipping coal shipping decreased by 1% to $985 million.
It seems likely that revenues from shipping products other than coal should continue, which bodes well for Union Pacific. Even revenues from shipping coal were only down slightly, and that was partially due to an October blizzard in Wyoming from the Powder River Basin mines.
Union Pacific's Future
Union Pacific's overall shipping volumes were up, but the biggest reason for the increase in earnings was pricing. During 2013 the railroads core pricing increased by 3.5%. In addition to higher pricing, the railroad will also benefit from the strategic positioning of its rail network, a steadily improving economy, and as the dominant railroad in the U.S. it will continue to have a pricing advantage over its competitors.
The railroads are often predictors of the state of the economy, that is why it was good news to hear Union Pacific's CEO, Jack Koraleski, say:
"The economy should continue to improve because auto sales, housing construction and manufacturing are predicted to be strong, and it doesn't look like Congress will derail the economy with another fiscal showdown."
He went on to say:
"Besides automobiles, shipments of frack sand, metals and lumber had risen."
When referring to how the improving economy could affect his company's business Mr. Koraleski said:
Union Pacific's stock Evaluation
Union Pacific's price to earnings ratio 19.2 and price to book ratio of 3.74 is slightly higher than its competitors. CSX Corporation (CSX) has a PE ratio 14.4 and PB ratio 2.7, while Norfolk Southern Corporation (NSC) has a PE ratio of 15 and a PB ratio of 2.7. However UNP's geographical reach, which includes 31,868 route miles (from the Pacific coast to the Gulf Coast to the Midwest to the industrial belt in the east), gives it an advantage over its competitors. For instance while the railroad competitors struggle to adjust to the ever slowing business of shipping coal, Union Pacific has been able to make adjustments to take advantage of the boom in the oil and natural gas production. In 2012 it spent $3.6 billion and in 2013 it spent $3.7 billion to improve its rail network.
Many investors might think of Union Pacific as being a staid slow growth industrial company, however in recent years the value of the stock has exploded. Over the past five years, the stock price has increased by over 440%, and the dividend has been raised seven times to grow by a total of 292%.
Upon the release of the fourth-quarter earnings announcement, Union Pacific's stock price jumped higher by 3.3%. Apparently investors liked the earnings report and the company's outlook for the future. I believe that Union Pacific will keep chugging along. And while the stock's rate of appreciation will slow down, the company will continue to move higher. I rate the stock as a buy.
Disclosure: I have a position in UNP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.