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Summary

  • The stock is fairly valued at these price levels.
  • The financial efficiency ratios have increased from 4Q13 to 1Q14.
  • The company is a great gauge for the micro and macro economies.

The last time I wrote about Union Pacific Corporation (NYSE:UNP) I stated, "Due to the tiring bullish technicals, fair valuation on future growth, and macroeconomic concerns I'm not going to be buying a position at this price." Since writing the article, the stock has increased 11.95% versus the 7.7% gain the S&P 500 (NYSEARCA:SPY) posted. It's safe to say that I missed out on a great move up. 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 April 17, 2014, the company reported first quarter earnings of $2.38 per share, which beat the consensus of analysts' estimates by $0.01. In the past year, the company's stock is up 27.33% excluding dividends (up 29.28% including dividends) and is beating the S&P 500, which has gained 21.19% in the same time frame. Since initiating my position back on May 21, 2013, I'm up 20.92% inclusive of reinvested dividends and dollar cost averaging. 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 right now is a good time to purchase more of the stock for the services industry of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 20.55, 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 16.09 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.53), 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 13.41%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 13.41%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 15.17%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

My Target Price ($)

PEG

EPS next YR (%)

28Sep13

156.59

17.81

14.33

10.93

164

1.21

14.76

04Nov13

153.76

16.95

14.36

10.71

161

1.19

14.22

05Dec13

162.37

17.90

15.16

10.71

161

1.25

14.29

21Feb14

179.12

19.01

14.64

12.24

184

1.45

13.10

07Jul14

100.26*

20.55

16.09

6.23*

93*

1.53

13.41

* - value adjusted for the 2:1 stock split back in early June.

Financials

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 1.82% with a payout ratio of 37% of trailing 12-month earnings while sporting return on assets, equity and investment values of 9.1%, 21.6% and 15.5%, 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 1.82% yield of this company alone is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 8 years at a 5-year dividend growth rate of 26.1%. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

28Sep13

2.02

36

8.6

20.7

15.1

04Nov13

2.06

35

8.8

20.9

15.1

05Dec13

1.95

35

8.8

20.9

15.1

21Feb14

2.03

39

8.9

21.2

15.5

07Jul14

1.82

37

9.1

21.6

15.5

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the hovering in middle-ground territory for the past two weeks with a current value of 54.9. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height, indicating bullish momentum may start to mount. As for the stock price itself ($102.16), I'm looking at $102.16 to act as resistance and the 50-day simple moving average (currently $97.94) to act as support for a risk/reward ratio, which plays out to be -2.31% to 1.9%.

Best Gauge For The Broader Economy

This is one of the four times in a year where investors pay extra attention as companies begin to report their previous quarter's earnings. Union Pacific is my favorite company to follow during earnings season because it can provide a glimpse into the future with respect to a slow down or acceleration in a particular sector of the economy. The company hauls cargo for the agriculture, automotive, chemicals, coal, and industrial products industries. A potential increase or decrease in those particular segment revenues can be a leading indicator for a company, which operates within that segment. Not only can the company's earnings report be useful on a microeconomic level, but it can be useful on a macroeconomic level. For example, between the fourth quarter of 2013 and first quarter of this year, revenues were flat. During this time, U.S. gross domestic product as given by the Commerce Department showed first quarter shrinkage to the tune of an annual rate of 2.9%. I believe if we see a contraction in segment revenues from Union Pacific that it may be possible to see second quarter GDP shrinkage again.

Conclusion

I totally missed out on a great move upwards from the end of February till now, but that's okay because the rest of my position appreciated. Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates and earnings growth expectations having great near- and long-term earnings growth potential. Financially, the dividend is a bit small but definitely has room to grow while the company showed increased financial efficiency in the first quarter. On a technical basis the stock has been meandering at the $100 level for the past couple of weeks but I also believe the risk is higher than the reward right here. I like the stock but won't be buying into it this week.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long UNP, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Union Pacific Is A Great Gauge For How The Economy Is Doing