All Aboard for Union Pacific

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would like to focus on a company engraved in the history of the rise of the United States as an industrial power: Union Pacific Corporation (NYSE: UNP).

<img src="http://stockcharts.com/c-sc/sc?s=UNP&p=D&yr=1&mn=0&dy=0&i=t35325389887&r=1356383212543" />
 

Strengths:

  • Slow & Stable Revenue Growth: In 2006, Union Pacific reported revenue of $15.6 billion; in 2011, the company announced revenue of $19.6 billion, representing year over year annual growth of 4.67%. This trend of slow and steady revenue growth is widely anticipated to continue into the future, with projections estimating 2016 revenue at $26.4 billion.

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  • Dividend: Currently Union Pacific pays out quarterly dividends of $0.69, which, when annualized, means the dividend yields 2.20%.
  • Institutional Vote of Confidence: 82% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future.
  • Comfortable Margins: At the moment the company possesses a net profit margin of 16.83%, representing a strong and profitable company.
  • Established & Diversified Nature: Union Pacific operates North America’s premier railroad system, covering 23 states in the western two-thirds of the United States, and possesses 31,900 miles of railroads. With the established and diversified nature of the company comes a certain level of security and predictability.

Weaknesses:

  • Pricey Valuation: Union Pacific currently carries a price to earnings ratio of 15.54, a price to sales ratio of 3.02, and a price to book ratio of 3.25, and when Union’s slow paced growth is taken into consideration, the company appears to possess a pricey valuation.
  • Extreme Cyclical Nature: Union Pacific is an incredibly cyclical company, and is very susceptible to any economic downfalls, a major downside to the business.
  • Debt: Currently Union Pacific possesses about $8.8 billion of debt on their balance sheets, a substantial downside to the business.

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  • Reliance on Coal: In 2010, 22% of freight revenue was derived from energy products, including coal, an energy source which has been nearly squashed by the Obama administration. According to Murray Energy, regulations from the EPA and a possible carbon tax could lead to the “total destruction of the coal industry by as early as 2030.”

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1900, Union Pacific has consistently raised their payouts, and this trend is widely anticipated to continue into the future.

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  • United States Economic Growth: If the United States economy was to grow, business would expand, as more people would have more things to have transported, increasing Union Pacific’s revenues.
  • Capturing Market Share: Union Pacific competes with several other major corporations for share of the massive railroad market, and capturing market share could significantly benefit business.
  • Acquisitions: In June 2012, Union Pacific acquired the yard control systems division of Ansaldo STS USA, and further acquisitions should fuel growth into the future.

Threats:

  • Rise in Fuel Prices: Union Pacific utilizes millions of gallons of diesel to run its vast fleet of trains, and any rise in diesel prices could hurt the company’s bottom line and squeeze margins.
  • Competition: Union Pacific competes with several other major corporations, and this fierce competition can lead to margin compression as all companies attempt to offer the best product for the least amount of money.
  • Economic Downfall: Union Pacific is an extremely cyclical company and depends heavily on the United States prospering. The chart below displays the pain felt by the company during recessions, especially in the most recent recession.

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  • Government Regulation: Any regulation by the government on any of the products Union Pacific transports could hurt the companies that produce the products, and thus lead to less business for Union Pacific.

Competition:

Major publicly traded competitors of Union Pacific include Kansas City Southern (NYSE: KSU), CSX Corporation (NYSE: CSX), Norfolk Southern Corporation (NYSE: NSC), and Canadian Pacific Railway Limited (NYSE: CP). All of these companies operate railroad systems and compete with Union Pacific to transport goods. Kansas is valued at only $9.16 billion, and pays out a dividend yielding 0.94%; however, it carries a pricey 24.04 price to earnings ratio. CSX is Union’s largest competitor, is valued at $20.47 billion, pays out a dividend yielding 2.82%, and carries a reasonable 11.09 price to earnings ratio. Norfolk is valued at $19.59 billion, pays out a dividend yielding 3.23%, and possesses an inexpensive 11.28 price to earnings ratio. Finally, Canadian Pacific is valued at $17.62 billion, pays out a dividend yielding 1.38%, but carries an expensive 25.23 price to earnings ratio.

The Foolish Bottom Line:

Union Pacific is a staple of the United States economy, and possesses an unmatched level of stability and predictably. The company possesses a slow but steady revenue growth rate with an established dividend program. The bottom line is that Union Pacific is as steady and stable as they come, and is a tremendous addition to any long-term portfolio.  


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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