UNION PACIFIC CORPORATION
APRIL 18, 2013
Dan Ballantine & Keaton J. Cervantes
Agenda
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Introduction
Macroeconomic Outlook
Industry Overview
Company Overview
Financial Analysis
Valuation
Recommendation
Union Pacific Corporation
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Incorporated in 1862
Headquarters is located in Omaha, Nebraska
45,928 full-time employees (86% under union
contract)
Operates 31,868 miles of track
Maintains a fleet of 8,391 locomotives
Provides rail service to 23 states throughout the
Midwest, Western United States, and Mexico
Source: Union Pacific 2012 10-K
Macroeconomic Outlook
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Continued decline in coal
shipments
Shale oil boom causes supply
bottlenecks
Push to modernize fleets
End of drought brings increased
agricultural shipments
Increased production in Mexico
Source: Wall Street Journal
Macroeconomic Outlook
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Keystone XL Pipeline
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Intended to relieve the
supply build-up in Midwest
and Canada
Proposed route crosses the
Ogallala Aquifer
Permit was denied on
January 18, 2012 by
President Obama
Source: keystone-xl.com
Macroeconomic Outlook
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Keystone XL Pipeline
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Permit was denied based
on possible environment
consequences
Recent pipeline failure in
Arkansas has reignited
fears of environmental
impact of pipeline
Approval is uncertain at the
moment
Source: Wall Street Journal
Macroeconomic Outlook
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US-Mexico Rail Trade
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Steadily increasing
trade values in four
major areas
Mexico Automotive
Production:
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Projected to increase
38% in the next three
years due to higher
labor costs in China
Source: US DOT Federal Railroad Administration,
Bloomberg
Industry Forces Analysis
Buyers:
MEDIUM
New
Entrants:
LOW
Rivalry:
MEDIUM
Suppliers:
HIGH
Substitutes:
HIGH
Industry Forces Analysis
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Bargaining Power of Suppliers: HIGH
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Bargaining Power of Buyers: MEDIUM
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Some inputs with no pricing power (fuel)
Low number of locomotive and rail suppliers
Relatively few industry competitors
High number of alternatives
Threat of New Entrants: LOW
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Capital intensive business with high barriers to entry
Geographic specificity
Industry Forces Analysis
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Threat of Substitutes: HIGH
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Many alternatives to transporting goods including river
barge, trucking, and pipeline
Rivalry among Competitors: MEDIUM
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Limited companies in the industry
Limited direct competition due to geographic
differences of the main industry players
Company Overview
Source: Union Pacific Website
Company Overview
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Freight Revenue (94%)
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Agricultural
Automotive
Chemicals
Coal
Industrial Products
Intermodal
2012 Freight Revenue
Other Revenue (6%)
Source: Union Pacific 2012 10-K
Company Overview
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Positives
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Revenue generated from chemical shipments (including
oil) is up 20% in 2012
45% of revenue from Mexico is through automotive
shipments
As the drought weakens, agricultural shipments will
steadily increase
Increase in fuel costs partially offset by fuel surcharges
Issues
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Year-over-year reduction in shipments of coal
Company Overview
Source: Union Pacific 2012 10-K
Business Risk Analysis
Fluctuating fuel
costs
Required to
transport
hazardous cargo
Subject to
government
regulation
Sensitive to
general economic
conditions
Work stoppage
due to unionized
labor
Vulnerable to
political events
SWOT Analysis
Strengths
Weaknesses
- Excess cash reserves can
- Largely unionized workforce
allow UNP to upgrade fleet
may lead to work stoppages
- Rail lines provide access to
- Aging locomotive fleet
shale oil reserves
- Strong operational efficiency
Opportunities
Threats
- Continued growth in oil
shipments
- Upgrade fleet to be more
fuel efficient
- Increased trade between US
and Mexico
- Keystone XL approval
- Economic downturn
- Continual decline in coal
shipments
Strategy
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Invest in network of rail and locomotives by
replacing existing equipment, in addition to
compliance with Positive Train Control (PTC)
Increase the use of fuel surcharges to reduce
vulnerability to rising fuel costs
More efficient locomotives
Increased shareholder returns through additional
dividend raises and share repurchases
Source: Union Pacific 2012 10-K
Management Outlook
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Concern over decreased coal volume in 2013
Concerns over agricultural volume in the first half of
2013
Long-term acceptance of the Keystone XL pipeline
Additional investment in intermodal terminals
Additional growth opportunities through trade with
Mexico
Target of sub-65% operating ratio by 2017
Source: Union Pacific Barclay’s Conference
Recent News
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New CEO named in March 2012:
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Previous CEO took a medical leave due to cancer
2012 marked Union Pacific’s 150th year of
existence
4Q 2012: record quarter profits in addition to most
profitable year in company’s history
Record safety performance in 2012, despite a June
2012 collision of two Union Pacific trains in
Goodwell, Oklahoma, killing three
Source: Union Pacific Website News Releases
Recent Financial Information
Revenues ($ millions)
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$2008
2009
2010
2011
2012
2011
2012
Net Income ($ millions)
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$2008
2009
2010
Source: Union Pacific 2012 10-K, 2010 10-K
Recent Financial Information
Operating Ratio
Source: Union Pacific 3/5/13 Raymond James
Presentation
Current Stock Information
Metric
Current Stock
Price
Trailing P/E
Forward P/E
Dividend Yield
Market Cap
($ millions)
Value
$136.94
16.56
14.58
2.02%
$64,142.7
Source: Capital IQ, Yahoo Finance
Financial Analysis
Current Ratio
Quick Ratio
Cash Ratio
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
Debt/Assets
Debt/Equity
Interest Coverage
Liquidity Ratios
2008
2009
0.98
1.37
0.36
0.43
0.43
0.69
2010
1.16
0.58
0.37
2011
1.12
0.61
0.37
2012
1.16
0.64
0.34
Profitability Ratios
2008
2009
22.68% 23.98%
13.01% 13.42%
6.01%
4.62%
15.07% 11.72%
2010
29.36%
16.39%
6.50%
16.02%
2011
29.27%
16.83%
7.47%
18.12%
2012
32.23%
18.84%
8.55%
20.51%
Solvency Ratios
2008
2009
0.22
0.23
0.58
0.58
7.97
5.65
2010
0.21
0.52
8.27
2011
0.20
0.48
10.01
2012
0.19
0.45
12.61
Financial Analysis
A/R Turnover
Days Sales Outstanding
Fixed Asset Turnover
Total Asset Turnover
Activity Ratios
2008
2009
29.31
22.45
12.45
16.26
0.51
0.39
0.46
0.34
2010
18.34
19.90
0.45
0.40
2011
15.13
24.12
0.50
0.44
2012
15.32
23.83
0.51
0.45
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
DuPont Analysis
2008
2009
65.60% 67.98%
87.46% 82.31%
22.68% 23.98%
45.24% 33.35%
2.57
2.50
15.14% 11.20%
2010
63.48%
87.91%
29.36%
39.37%
2.43
15.65%
2011
63.90%
90.01%
29.27%
43.37%
2.43
17.72%
2012
63.49%
92.07%
32.23%
44.38%
2.37
19.84%
Comparable Companies
Revenue
($ millions)
Market Cap
($ millions)
Miles of
Track
Revenue/
Track Miles
Canadian National
Railway Company
$9,788
$41,697
20,100
$486,970
Canadian Pacific
Railway Limited
$5,619
$21,644.6
14,400
$390,229
CSX Corp.
$11,756
$25,038
21,000
$559,809
Kansas City Southern
$2,239
$11,876
6,300
$355,333
Norfolk Southern
Corp
$11,040
$24,156
20,000
$552,000
Union Pacific
Corporation
$20,926
$66,170
31,868
$656,646
Company
Source: Capital IQ
Stock Performance
Source: Yahoo Finance
Comparable Company Analysis
Target Company
Union Pacific Corporation
Ticker Symbol Price/Book
Forward
Forward
(Exchange)
Value
TEV/Sales
TEV/EBITDA Forward P/E
UNP (NYSE)
3.40x
3.36x
8.00x
15.04
Comparable Companies
Canadian National Railway Company
Canadian Pacific Railway Limited
CSX Corp.
Kansas City Southern
Norfolk Southern Corp.
CNR (TSX)
CP (TSX)
CSX (NYSE)
KSU (NYSE)
NSC (NYSE)
Comparable Statistics
High
Median
Low
Mean
3.90x
4.40x
2.80x
3.90x
2.50x
4.61x
4.25x
2.81x
5.60x
2.85x
9.90x
11.40x
7.30x
13.90x
7.80x
16.22
20.35
13.69
26.10
13.82
4.40x
3.90x
2.50x
3.50x
5.60x
4.25x
2.81x
4.02x
13.90x
9.90x
7.30x
10.06x
26.10
16.22
13.69
18.04
Source: Capital IQ
Comparable Company Analysis
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
Multiple
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA
Forward P/E
UNP Implied Stock Price
Low
$
$
$
$
103.68
110.83
122.88
128.59
Implied UNP Share Price
Median
High
$
161.73 $
182.47
$
178.63 $
242.19
$
174.30 $
253.40
$
152.35 $
245.16
Weight
30%
30%
15%
25%
Mean
$
$
$
$
Implied UNP
Stock Price
$
145.15
$
167.99
$
177.46
$
169.41
$
162.91
Source: Capital IQ
145.15
167.99
177.46
169.41
Discount Rate
CAPM
Risk-Free Rate
Market Risk Premium
5-Year Beta
CAPM Cost of Equity
3.12%
6.00%
0.74
7.53%
Annual Realized Returns
Year
1
2
3
4
5
Actual
33.55%
13.93%
29.44%
66.00%
-27.50%
Total Realized Return
137.03%
Arithmetic Annual Return
Geometric Annual Return
23.08%
18.84%
Discount Rate
Weighted Average Cost of Capital
Share Price
$ 141.27
Shares Outstanding (millions)
468.40
Market Value of Equity
$ 66,170.87
Debt
8,997.00
Percent Equity Weight
Percent Debt Weight
88.03%
11.97%
Cost of Debt
Cost of Equity
CAPM Cost of Equity
UNP Realized Return
Cost of Equity
5.95%
Tax Rate
WACC
7.53%
18.84%
12.05%
38.0%
11.05%
60.00%
40.00%
Cost of Equity
Weightings
DCF Analysis
Union Pacific Corporation Discounted Cash Flow Analysis ($ millions)
Net Income
Depreciation
Capital Expenditures
Changes in Net Working Capital
Less Increases in A/R
Less Increases in Inventories
Plus Increases in A/P
Free Cash Flow
Present Value
Discount Rate
2014E
5,483
1,836
(3,700)
2015E
6,149
1,924
(3,800)
2016E
7,057
2,014
(3,500)
(101)
(104)
418
3,153
2,839
(139)
(103)
451
3,828
3,104
(138)
(79)
481
4,537
3,312
(120)
(70)
468
5,849
3,846
2017E Terminal Value
8,152
1,925
(2,300)
(19)
(93)
434
8,098
4,794
103,578
61,322
11.05%
Calculation of Implied Share Price
Implied Enterprise Value
Less Debt
Plus Cash
Implied Market Cap
Implied Share Price
2013E
4,671
1,869
(3,600)
$
$
$
$
$
79,218
(8,997)
1,063
71,284
152.19
Terminal Value
Terminal Growth Rate
3.00%
Decision Drivers
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Strengths
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Improved operating ratio and efficiency
Short-term growth in oil transportation in addition to
longer-term growth in Mexico
Management’s plan to return cash to shareholders
GICS Diversification
Concerns
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Sensitivity to approval of Keystone XL pipeline
Declining demand for coal
Recommendation
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Valuation Summary
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Current Stock Price: $136.94 per share
Comparable Companies Valuation: $162.91 per share
DCF Valuation: $152.19 per share
Recommendation: BUY
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Buy 100 shares at current market price
100 shares at current market price = $13,694
Questions?