Investment Thesis
Union Pacific is one of the four major railroad companies of the United States. The company's railroads play an integral role in delivering food, energy, metals and minerals, cars, and industrial equipment to over 200 million Americans across the Mid-West and the West Coast. Railroads remain one of the best and most efficient long-haul mode of commercial transportation, which puts Union Pacific in a strong position.
Due to lower travel and shipping demand with COVID, Union Pacific has experienced a slump in revenue growth, however the Unified Plan 2020 which was started in 2018 looks to add increased cost savings as demand returns to normal. With a wave of demand likely as the world economy restarts and industry leading efficiency Union Pacific is a firm worth holding into the future.
Company Description
Union Pacific Corporation is a rail transportation company. The Company's railroad hauls a variety of goods, including agricultural, automotive, and chemical products. Union Pacific offers long-haul routes from all major West Coast and Gulf Coast ports to eastern gateways as well as connects with Canada's rail systems and serves the major gateways to Mexico.
Some Key Metrics
Metric | Data Point |
|---|---|
Return on Invested Capital (5Yr Avg.) | 13.44% |
5 Yr. CAGR of EPS Growth | 14.4% |
FCF Yield | 4.4% |
Net Debt/EBITDA | 2.75 |
Durability of Business
Union Pacific is only second to Warren Buffett's railroad empire, BNSF, in terms of revenue. As one of the primary railroad operators for the mid-West, the West Coast, and to Mexico it is easy to see how Union Pacific figuratively and literarily built itself one of the largest moats in corporate America. Union Pacific has also become very innovative with their process improvements through the implementation of the Unified Plan 2020 positioning them better than many of the other rail companies. UP as a result has a great market position and ecosystem of rails in comparison to competitors.
UP has significant growth potential during the COVID recovery. UP does expand using inorganic growth, but due to their being only a few large rail companies typically it is though buying minority stakes and making partnerships.
Management:
UP's management all have high levels of experience within the railroad industry. Jim Vena however is the architect of the Unified Plan 2020 and is probably the most valuable executive in the rail industry. UP seems adaptable in relation to other rail companies, but the rail industry has been highly regulated since the 1800s which limits the effectiveness of this agility.
Research by: Kevin Hurley, Drake Cody, Clark Agnew
Portfolio Manager: Raymond Kanyo, CFA