Union Pacific CorporationUNP

Morningstar Rating

Stock Research and Analysis

by Keith Schoonmaker

Union Pacific is one of North America's largest railroads, but its margins and free cash flows lag those of better-performing Class I peers. UP has near-term potential for improvement, but our interest is moderated by its historical second-tier performance. Read more

Bulls Say

Union Pacific's western tracks afford access to attractive defensive segments. This rail hauls a cargo mix rich in commodities with less cyclical demand, like agriculture products, coal, and containers ferrying imported goods from Asia.

Compared with trucking, shipping by rail is less expensive for long distances, is 3 times more fuel-efficient per ton shipped, and does not contribute to highway crowding.

Coal that UP hauls from the Powder River Basin is substantially less expensive (on a delivered price per million BTUs basis) than coal from other regions and costs less than one fifth the price of natural gas.

Between 2005 and 2008, UP increased revenue from $13.6 billion to $18.0 billion, improved its operating ratio from 86.8% to 77.3%, and increased net income from $908 million to $2.34 billion.

Union Pacific assets serve several important West Coast ports, such as Los Angeles, Tacoma, and Oakland. UP has more points of entry to Mexico than any other rail. These routes provide access intermodal volume. Read more

Bears Say

Union Pacific's profitability and returns on invested capital have improved but remain at the bottom of the industry.

Railroads face risk of reregulation on several fronts, including safety bills and Surface Transportation Board-permissible rate calculations.

Unlike trucking firms, railroads must purchase and maintain their road. High required maintenance capital expenditures consume more than 15% of revenue annually.

UP's large automotive franchise contributed 9.5% of 2007 freight revenue, which hurt when the firm's auto volume dropped 19% during 2008.

Canadian Pacific's CP purchase of the Dakota, Minnesota, and Eastern line may lead to the entry of a third competitor in the Powder River Basin coal region within a few years, which could threaten UP's coal volume.

Strategy

Union Pacific is focused on reducing terminal dwell time, improving car utilization, and increasing average train speed. The firm reprices contracts as they expire in order to improve yields in this Read more

Management

In 2008, James Young completed his third year as chief executive and his second as chairman of the board. Because North America's rail environment is healthier than it has been in years, we expect the firm to benefit from external factors during this Read more

Profile

Omaha, Neb.-based Union Pacific is one of the largest railroads in North America. Operating on 32,000 miles of track in the western two thirds of the U.S., UP's 50,000 employees Read more

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