All Aboard Union Pacific

| About: Union Pacific (UNP)

Executive summary:

  • Union Pacific Corporation (NYSE:UNP), Canadian National Railway (NYSE:CNI) and Norfolk Southern Corporation (NYSE:NSC) moved modestly higher relative to the S&P 500 over the past year.

  • Union Pacific led the group with a 30% gain.

  • UNP will continue to be the leader in freight rail due to a robust underlying business.

  • Improving conditions in Mexico and strong agricultural returns will lead UNP higher.



Union Pacific thrives due to its focus on shipping. Union Pacific's principal operating company, Union Pacific Railroad, is North America's premier railroad franchise, covering 23 states across the western two thirds of the United States. The services UNP provides can be broken down into seven main categories. Those seven categories are agriculture, automotive, chemicals, coal, industrial products, intermodal operations and Mexican operations. Of the seven segments, Mexican and agricultural will move UNP higher in the coming year.

Robust Growth In Agricultural Products

The agricultural products division ships everything from frozen food and beverages to a variety of grain products. One of Union Pacific's many innovative transportation solutions is the company's coast to coast refrigerated produce transportation. The company utilizes its large refrigeration system with Express Lane.

As stated on UNP's website, "Express Lane is a priority train service developed by Union Pacific and CSX Transportation (NYSE:CSX) to ship foods from California and the Pacific Northwest to various destinations across the eastern half of the United States." Since Express Lane was started in 2000, ExpressLane has shipped more than 11 million tons of product with a 98% on-time delivery track record from shipper to receiver. Below is a map showing Express Lane's vast coverage of the United States.

Better yet, Union Pacific has the largest fleet of refrigerated boxcars in the industry with 4,950 units. The boxcars are environmentally friendly and comply with the California Air Resources Board standards. In addition to food services, Union Pacific's Agricultural Products team also ships biofuels including ethanol, biodiesel and dried distiller grains. Union Pacific aims to help biofuel producers move products and co-products through the distribution chain in an effective and cost-efficient manner. Like Union Pacific's distribution of food throughout the United States, the company's distribution of biofuels is equally extensive. The map below shows the effectiveness of Union Pacific's biofuel operations.

This past year, the agricultural products segment experienced strong YTD volume, as seen in the chart from UNP below.

The next chart explains the strong growth in the agricultural segment of UNP's operations, expanding grain exports. As seen in the image below, the USDA forecasts greater exports and a greater grain and soybean crop for 2014.

Given an established Express Lane Network and better crop forecasts for next year, expect another year of strong returns in agricultural operations.

Improving Mexican Operations

Union Pacific's involvement in the Mexican markets sets the company apart from other railroad corporations. Union Pacific is the only transportation company with access to all six major gateways between Mexico and the United States. Union Pacific also has a team of bilingual professionals that make trade between the two countries as easy as possible. Mexican auto production is set to increase by 6.9% from 2013 into 2014 and UNP's established position in the Mexican market (image from UNP seen below) allows UNP to access growth in the Mexican auto market.

As seen in the next image from UNP below, the Eagle Premium Service connects Mexico's second largest consumer market to Los Angeles and St. Louis. Both St. Louis and Los Angeles are new destinations from the Mexican hub while the connection to Chicago is an established route.

The New Eagle Premium Service, along with strong connections to the Mexican auto market, will lead to improved Mexican operations.

Automotive Operations

Union Pacific also dedicates itself to shipments in the automotive industry. Union Pacific ships both automotive parts and new vehicles in their entirety and the company cites, "Dedicated automotive logistic experts, an established door-to-door network, and expedited routes between Mexico and Canada, including all major gateways, make Union Pacific the premier automotive parts carrier in North America." Union Pacific also dominates the distribution of new vehicles as it is the largest automotive carrier in western United States. Union Pacific operates over forty vehicle distribution centers and they directly serve six vehicle assembly plants. An estimated 70% of new vehicles produced use rail for delivery. Union Pacific handles more than 70% of western US rail automotive market share, making the automotive section of Union Pacific's product line a large part of the company's success. Union Pacific has also created a transit tracking system which companies can utilize freely to see how far away a current shipment may be.

Chemicals, Coal and Industrial Products

Union Pacific's Chemicals group ships a large variety of products including crude oil, liquid chemicals, fertilizer, and soda ash. Union Pacific works to coordinate the shipment of crude oil, condensate and NGLs through the distribution in an effective yet environmentally safe manner. The company recently held a conference in Houston, Texas, to discuss shipping safely chemicals and other hazardous goods throughout the Americas. More than 70 corporations showed up. Union Pacific's Coal team works to transport coal to the utility, industrial and export markets. Every year Union Pacific transports more than 200 million tons of coal from mines throughout the country. Union Pacific currently serves mines in the South Powder River Basin, Utah, Colorado, Southern Wyoming and Southern Illinois. The company's wide geographic range allows the company to deliver coal to plants across the country from as far North as the Great Lakes to plants near the Gulf. Like Union Pacific's involvement in the automotive industry, their Industrial Products Team ships a variety of both raw and finished products. Some of the essential products shipped by the Industrial Products Team include aggregates, cement, roofing materials, government-related items, wind turbine components, generators, household appliances, lumber and panel products, pipe, sheet steel, beams, scrap metal, sand, lime, clay and waste.

Intermodal Operations

Union Pacific thrives in the distribution of a variety of goods largely due to the company's focus on intermodal transportation of products. Intermodal shipping incorporates multiple forms of transportation in addition to rail to provide the fastest and most reliable distribution possible. Union Pacific utilizes the trucking industry to provide reliable door to door or ramp to ramp services, while incorporating its developed chain of railroads throughout the country. Union Pacific has the largest network of intermodal shipping in North America. UNP has also recently expanded the size of its intermodal systems and will continue to do so throughout 2014, especially in regards to intermodal shipments in Mexico. Union Pacific has the largest investment program in the industry with more than $1.1 billion invested in the expansion of its intermodal operations. Union Pacific will be looking to greatly expand its intermodal operations into Mexico in 2014, also leading Mexican operations higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.