The Number One Railroad

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

Union Pacific (NYSE: UNP) is the best railroad in the country, you can argue this point, but the numbers don't lie. Investors only need to look at the company's recent earnings for proof. In addition, like other railroads, investors in Union Pacific get a veritable industry cheat sheet with every earnings report. In this way, buying Union Pacific is like buying a great stock, and a cross industry report at the same time.

Better Delivery Times Equals Better Earnings:

In the last three months, revenue increased 5% and diluted EPS jumped 18%. The company improved in several metrics with its customer satisfaction index three points better than last year, and quarterly train speed up 6% on a year-over-year basis. Just for point of comparison, Union Pacific's train speed was 26.1 mph versus competitor CSX (NYSE: CSX) reported train speed was 22.6 mph. This might not sound like a lot, but when deliveries get from point A to point B faster, the company makes more profit. Union Pacific has also outpaced its competition in other areas as well.

The Fastest Growth Among Its Peers:

If you look at Union Pacific's performance relative to its competition, analysts expect faster growth, and Union Pacific has consistently beaten their expectations. In fact, take a look at what analysts are expected from each of the three major players in the industry, and consider what might happen if Union Pacific continues to exceed analysts’ expectations.

Name

Earnings Growth Next 5 Years

Beat Expectations # and %

CSX

13.83%

Beat 3 of 4, Avg. 4.38%

Norfolk Southern (NYSE: NSC)

13.72%

Beat 4 of 4, Avg. 7.75%

Union Pacific

14.40%

Beat 4 of 4, Avg. 6.55%

(*source Yahoo Finance) 

As you can see, all three railroads are expected to see significant EPS growth in the next few years. However, when you adjust for the average earnings beat, Union Pacific shows the highest future potential growth rate at 15.34% (14.40% * 1.0655). Even if you adjust for Norfolk Southern's earnings outperformance, the company would report roughly 14.78% growth if it continues its current streak. Though Union Pacific is priced higher than its competition, you can see based on earnings projections that this premium may be warranted.

Strong Margins Lead The Industry:

If investors need more proof that Union Pacific could be the best railroad in the country, take a look at the company's pretax operating margin. According to Fool.com, Union Pacific shows an almost 30% pretax operating margin on a year-to-date basis. By comparison, Norfolk Southern comes in second at 27.40%, and CSX places third with an operating margin of 25%. In an industry where each company offers similar capabilities, the one with the highest pretax operating margin is in theory the most efficient. This is yet another reason investors should put Union Pacific at the top of their list.

Average Revenue Per Car Up Across The Board:

One of the primary goals of any railroad is to increase their average revenue per carload, while increasing overall volumes. Union Pacific saw significant growth across several industries. The company saw revenues from chemical shipments up 17%, and automotive shipments increased 15%. This argues for strong end demand for companies in each of these industries. Intermodal shipments were also up 8%, and industrial products were higher by 2%. The two lagging industries were agricultural which reported shipments down 4%, and coal shipments decreased by 5%. What was interesting was even though coal was down in volume, average revenue per car actually increased 9%. Only the agricultural industry showed both volume and average revenue per car decreasing. This just shows that Union Pacific is able to match its carloads appropriately to volume growth. 

Conclusion:

I've compared Union Pacific in the past two its competition
, and found that across-the-board this railroad shows the best combination of traits. This continues to be the case, and management believes that the shares are a good value as well. In fact, in the current quarter the company retired 3.1 million shares at an average price of $122.13. On a year-over-year basis, diluted shares are now down over 2.6%. While the company's yield is lower than its competition, Union Pacific's earnings growth should exceed its competitors. The company also showed a free cash flow payout ratio of under 58% in the current quarter. Since Union Pacific is expected to grow earnings faster than its competition, the company should be able to increase its dividend at a greater rate. Most investors choose one company to represent an industry in their portfolio. I firmly believe if you're looking for a railroad to represent the transportation industry, UNP should be at the top of your Watchlist.

 


MHenage 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.If you have questions about this post or the Fool’s blog network, click here for information.

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