One of the first questions that people should ask themselves before they consider making a purchase is an often forgotten one. Instead of concentrating on how much a potential investment can make, first what should be considered is how much can possibly be lost. Losses can undermine a portfolio to an extent much greater than paltry gains can, of course, but people unfortunately tend to eschew this fact many times during the decision making process. Union Pacific (UNP) has some built-in features inherent to it which differentiate itself from numerous other stocks of similar market caps to its own, and in particular the trucking industry, with which it directly competes. The margin of safety with this stock is definitely above average. Here are 3 main features of it that I find very attractive:
1. Union Pacific has an oligopoly like structure. Essentially the railroad companies have divided the country up into their own personal territories. These territories are not easily or likely to be changed up. The barriers to entry are also very high. Union Pacific happens to have the largest portion of the country for their territory. This lack of competition leads to much leniency on the company's part when it comes to their setting of prices.
Union Pacific has 23 states in which they operate in, which are in the central and western half of the country. Their rail lines connect both to Mexico's as well as Canada's. It's a particularly advantageous geographical location because it allows the company to handle the copious amount of Chinese imports, which the United States relies on heavily.
2. The roads in the United States are falling apart, and every year as the county's population increases, the ability of trucks to navigate our roads decreases due to increased traffic. The fact is that cities and states are outgrowing their infrastructure at a much faster rate than those cities and states can afford to fix them, much less perform proper upgrades on them, which would be even more of an expense.
Two congressionally mandated commissions have even projected that the United States will need to possibly as much as quadruple what it spends each year to maintain and repair the aging transportation infrastructure it is responsible for. With our governments in tough economical situations, that should be seen as an extreme long shot, which it would very likely be even with them running much better than they are now. That is an increase to the point where it seems highly unlikely that it would occur. Meanwhile the damage is going to continue to accumulate on the roads.
3. On top of the decreasing navigability of the roads, government reports show that trucks severely underperform rails when it comes to fuel efficiency. Great advancements have especially been made in recent years to improve this among the railroads. They have become both environmentally friendly in addition to being cost-effective. Rising fuel prices in the future will further increase the attractiveness of the railroads.
Rails were brought to the forefront of the investing world a few years ago when Warren Buffett made a 34 billion dollar investment in Burlington Northern Santa Fe, a comparable company to Union Pacific. Among the discussions which existed during this event was how the rails were key economic indicators of the country's health, because of the amount of retail and manufactured goods which they haul across the country. Buffett himself was quoted as saying the purchase was an "all-in wager on the economic future of the United States."
To be sure, Union Pacific is indeed cyclical in nature, as you can see their revenues were hurt as a result of the slowdown we had during the recession. This is an important variable which must be examined when looking at this company.
They are not a company like Apple (AAPL) has been lately, where their success can be mutually exclusive from the United States' economy as a whole. They are, however, far more of a constant, not being subject to fashionable whims and lighting fast tech changes which can alter at any moment. Union Pacific's position is far more desirable.
For people who feel there has been a paradigm shift and the United States is fundamentally flawed, with problems it is unable to rid itself of, Union Pacific will not seem to be a good wager. For those who believe the last decade was atypical of what our economy will be doing in the future like I do, now is still a great entry point, as we still have yet to really see the economy move full steam ahead.
While Union Pacific has certainly seen its stock price rise considerably in recent years, the valuations are not extreme at all. Despite the share price rising over 100% since 2007, the price/earnings ratio currently sits at roughly 15. Union Pacific has also been sharing the wealth with its stockholders quite generously during the recent few years. Dividends have also been upped over 100% since 2007.
Disclosure: I am long UNP.