My stock selection process involves screening for wide moat companies, researching company financials, and subsequently finding the best deals of any given period of time from my watch list. This process is neither profound nor unique, as it is a typically recommended method for building a long term stock portfolio.
Each week, I update my list of best buys, and when I have capital available, purchase shares in the highest scoring stocks. For the past several weeks, the Union Pacific Corporation (UNP) has stood out from the crowd, priced at $85.94. Let's take a look why.
Company ProfileThe Union Pacific Railroad is a Class I line haul freight railroad that operates nearly 9,000 locomotives over 32,000 route-miles in 23 states west of Chicago and New Orleans. The Union Pacific Railroad network is the largest in the United States and is serviced by more than 50,000 employees. Check out this excellent website for more info on the company's history.
I love railroad stocks. They offer massive barriers to entry due to their extensive track networks. They are simple businesses that have existed for well over a century. And they have made a ton of money for shareholders.
FundamentalsUNP has growth revenues and earnings per share in the last 9 out of 10 years, the only slip up coming between 2008-2009 during the great recession. It has paid an increasing dividend for 9 years, while also reducing its share count from 1.08 billion shares in 2005 to 886 million shares today. The company has grown it's dividend over the past 5 years, which currently yields 2.5%, by 27 percent, and is still sporting a payout ratio below 40%. The stock has a return of 18.9% over the last ten years.
What impresses me most about Union Pacific is the company's dramatic 10 year growth in net margins (7% to 22%), return on equity (8% to 25%), and return on invested capital (6% to 16%). These numbers are indicative of a company that is becoming more efficient and more dominant in its field. Debt is reasonable with a long term debt to equity ration of .62.
ValueShares of UNP are trading at a TTM P/E ratio of 15 compared to its five year P/E low of 12. Its EV/EBITDA comes in at 8.1. A simple two stage DCF calculation indicates a fair value of $88.76, suggesting shares are trading at or slightly below fair value.
TechnicalsTechnical analysis is not something I follow with great seriousness, however, there is one indicator that I like to check out before making a purchase: comparative relative strength. Simply put, I'm checking out a stocks price performance relative to that of SPDR S&P 500 ETF (SPY). The objective is to note a change in trend. Check out the chart below on UNP:
As you can see, from late 2010 until early 2015, UNP trended positively against SPY. Year to date, UNP has trailed SPY.
So what does all this voodoo mean? It means that unless the fundamentals of the company have drastically changed, the market is irrationally undervaluing the stock. The chart is a bonus that gives me one extra confirmation that buying UNP right now is a good deal.
ConclusionUnion Pacific is a wide moat business with excellent fundamentals, which provides a solid, growing, safe dividend. It's currently on sale, despite drastically increasing margins, ROI, and ROE. What's not to like?