Investment Managers
Pien-Cheng (William) Wei
Sashikanth Yenika
Yue (Benjamin) Xu
Yuqing Zhang
Zeyu Chi
Presented on 11/05/2015
Agenda

Current Holdings

UNP – Company Overview

Industry Analysis

UNP – Financial Analysis

Peer Benchmarking

Financial Projections

Valuation

Recommendation
Current holdings

Purchased: 100 shares @ $148.20 on April,2013

Cost basis: $14,820

2 for 1 split in June, 2014

Sold: 100 shares @ $108.00 on April, 2015

Gain on sale: $3,390 (+45.75%)

Current market value: $8,819 (11/4)

Gain: $1,409 (+19.01%)
Company Introduction

Incorporated in 1862 with headquarter in Omaha,
Nebraska

Operates railroads and offers freight transportation
services

Links 23 states in the western two-thirds of the
country

Has the largest railroad network of 31,974 route
miles

The only railroad serving all six major Mexico
gateways

Maintain a fleet of 8,500 locomotives and is served
by around 50,000 employees
Sources: Union Pacific 2014 10-k (Pg. 5), UNP website
Business Overview
►
►
►
Revenue:

Freight revenue (94%)

Other revenue (6%)
Key Strategies

Increase network and terminal capacity

Replace old and less efficient locomotives with
new and more efficient
Key Risks Involved

Fluctuating US$

Volatile fuel prices

Regulations
Sources: Union Pacific 2014 10-k (Pg. 25, 38), Factbook 2014 (Pg.12, 30)
Freight Revenue
Automotive
Chemical 9%
s
16%
Industrial
products
20%
Intermod
al
20%
Agricultur
al
Products
17%
Coal
18%
Operating Expense
Equipmen
t & Other
rents, 8%
Depreciation, 13%
Purchased
Services &
Materials,
17%
Other, 6%
Compensi
on &
Benefits,
33%
Fuel, 23%
SWOT analysis
Strengths
Weaknesses
-
-
Diversified revenue streams
Legacy pricing contracts
Strong ROIC
-
-
Opportunities
-
-
Heavy dependence on few suppliers
of rail and locomotives
Affected by weather and climate
change
Volatile US$ and uncertain energy
environment
Threats
Agricultural and industrial product
growth
Increasing energy exposure incl. high value added frac sand
Only player with access to all 6
Mexico gateways
-
Intense internal and external
competition
Increased regulatory requirements
like open access and revenue
adequacy
Low fuel prices
Stock market prospects
Sources: Yahoo Finance!
Rail Transportation Industry - Overview
Key Products and Services


Operates short-haul and line-haul railroads,
and intercity passenger trains
Sensitive to import and export volumes, crude
oil prices, demand for coal and chemical
manufacturing
3.8%
Bulk Freight
51.8%
42.7%
Passenger Services
Market Share
12.4%
CAGR 3.0%
29.5%
CAGR 4.6%
80,000
Intermodal Services
Other Services
Industry Revenue
100,000
1.7%
14.4%
UNP
BNSF
60,000
CSX Corp
40,000
Norfolk
15.2%
Others
28.5%
20,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: IBISWorld
Key Drivers
Trade Value Growth %

Increase in US Trade Value




Improved economic growth in Mexico and
Canada

Rising global consumption

Expected US job and wage growth
Moderate growth in Industrial Production
Index (IPI)
Low crude oil prices
Decrease in coal demand
15%
10%
5%
(5%)
(10%)
(15%)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
6%
% Change in IPI
4%
2%
(2%)
(4%)
(6%)
(8%)
(10%)
(12%)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sources: IBISWorld
Porter’s Five Forces
Power of
Suppliers
High
Threat of
Substitute
Products
Rivalry
among
existing
competitors
Medium
High
Power of
Buyers
Medium
Threat of
New Entrants
Low
Financial Analysis
Margin Analysis
Return Analysis
40%
30%
35%
25%
30%
20%
25%
15%
20%
10%
15%
10%
5%
5%
2011
2010
2011
2012
Operating Margin %
2013
2014
Net Income Margin %
Return on Equity
Tax Burden
Interest Burden
Operating Profit Margin %
Asset Turnover
Leverage
RoE
Sources: Union Pacific 2014 10-k
2012
62.4%
93.7%
32.2%
0.5x
2.4x
20.3%
2013
2014
Return on Invested Capital
Return on Assets
DuPont Analysis
2011
62.5%
92.0%
29.3%
0.4x
2.4x
18.1%
2012
Leverage Analysis
2013
62.3%
94.7%
33.9%
0.5x
2.3x
21.2%
2014
62.1%
95.3%
36.5%
0.5x
2.5x
25.2%
Debt/Equity
Debt/Assets
EBIT Interest Coverage
2010
52.0%
21.4%
8.3x
2011
47.9%
19.7%
10.0x
2012
45.3%
19.1%
12.6x
2013
45.1%
19.3%
14.2x
2014
54.2%
21.8%
15.6x
Ratio Analysis
30%
40%
Greenblatt Ratios
25%
20%
30%
15%
20%
10%
10%
5%
UNP
CP
EBIT Margin %


KSU
HUBG
NSC
2010
2011
2012
EBIT/Tangible Assets
NI Margin %
Productivity gains due to new
locomotives
30%
Originates and delivers 60% of
traffic while it is 50% for peers
15%
2013
2014
EBIT/Enterprise Value
Greenblatt Ratios – Peer Comparison
25%
20%
10%
5%
UNP
CP
EBIT/Tangible Assets
Sources: Union Pacific 2014 10-k, Yahoo Finance!
KSU
HUBG
NSC
EBIT/Enterprise Value
Management Analysis

Effective corporate governance policies

10 out of the 11 directors are independent

Use of majority voting for annual board elections

Issued options represented <1% of outstanding shares during the recent years

No executive officers on board committees
Peer Benchmarking
CP transports merchandise freight of finished vehicles and auto parts, chemicals and
plastics, crude oil and forest products
• Network of about 13,700 miles serving from the business centers in Canada and US
• Trans-loading, warehousing and distribution services of steel products
KSU operates north/south rail route in the mid-west and southeast regions
Network of about 6,500 route miles from the mid-west and southeast
Customers including electric-generating utilities and intermodal transportation
HUBG provides intermodal, truck brokerage and logistic services in North America
Contracts with railroads to provide transportation for the shipment and freight
brokerage
Offers management services and technology solutions
NSC has rail transportation of raw materials, intermediate products, finished goods and
passenger trains
Operates about 20,000 miles of road in 22 states, bimodal truckload transportation
services
Sources: Union Pacific 2014 10-k, Yahoo Finance!
Peer Benchmarking (Contd.)
Company
Trailing P/E
Forward P/E
P/Sales
P/BV
Weight#
CP
15.26x
17.15x
3.34x
5.67x
30%
KSU
19.78x
17.08x
3.89x
2.48x
30%
HUBG
21.62x
17.88x
0.40x
2.25x
10%
NSC
14.24x
14.00x
2.23x
2.00x
30%
UNP
16.94x
16.25x
2.88x
3.27x
#Weight
of each company assigned according to their similarity of service line and revenue
sources with UNP
Sources: Capital IQ
Relative Valuation
Items
EPS (2014)
6.08x
Forward EPS (2015)
7.09x
Sales per share (2014)
28.15x
Book Value per Share (2014)
24.87x
Diluted Shares Outstanding
852m
Sources: Capital IQ
Price Multiples
Stock Price (Trailing P/E)
$103.02
Stock Price (Forward P/E)
$115.21
Stock Price (P/Sales)
$81.01
Stock Price (P/BV)
$81.28
Weighted Average
Current Price (11/4/2015)
Upside Potential
Weight
25%
25%
25%
25%
$95.13
$88.19
7.87%
Financial Projections
Million Dollars
2010
2011
Actual
2012
16,967
20.0%
19,557
15.3%
20,925
7.0%
21,964
5.0%
23,988
9.2%
24,481
2.1%
26,002
6.2%
4,314
2,486
1,487
4,681
3,581
1,617
4,685
3,608
1,760
4,807
3,534
1,777
5,076
3,539
1,904
5,355
2,171
2,018
Balance Sheet Items
Net Properties
Deferred Income Taxes
Treasury Stock
38,253
11,557
(4,027)
39,934
12,368
(5,293)
41,997
13,108
(6,707)
43,749
14,163
(8,910)
46,272
14,680
(12,064)
Cash Flow Items
CapEx
% Revenue
Common Share Repurchases
Debt Issued
(2,482)
14.6%
(1,249)
894
(3,176)
16.2%
(1,418)
486
(3,738)
17.9%
(1,474)
695
(3,496)
15.9%
(2,218)
1,443
(4,346)
18.1%
(3,225)
2,588
Revenue
Total Revenues
% Growth
Income Statement Items
Compensation and Benefits
Fuel
Depreciation
Sources: Association of American Railroads, Bloomberg
2013
2014
2015
2016
Projection
2017
2018
2019
2020
27,842
7.1%
29,629
6.4%
31,497
6.3%
33,344
5.9%
5,650
2,317
2,119
5,960
2,493
2,225
6,288
2,664
2,336
6,634
2,843
2,453
6,999
3,018
2,576
48,890
15,302
(16,059)
51,657
16,168
(20,059)
54,579
17,083
(20,609)
57,668
18,049
(21,159)
60,931
19,071
(21,709)
64,378
20,150
(22,259)
(4,435)
18.1%
(3,995)
2,362
(4,420)
17.0%
(4,000)
462
(4,733)
17.0%
(550)
606
(5,037)
17.0%
(550)
1,065
(5,354)
17.0%
(550)
578
(5,669)
17.0%
(550)
652
WACC
Weighted Average Cost of Capital
CAPM
Risk-Free Rate
Market Risk Premium
Beta
CAPM Cost of Equity
Sum of Present Value of FCF
2.17%
7.50%
0.93
Sources: Bloomberg, UNP Q3 10-Q
$88.19
852.0
$75,137.88
Market value of Debt
$13,319.00
9.17%
$143,582
Key Rates Assumption
Bussiness Risk Premium
WACC
Discount Rate
Terminal Growth Rate
Share Price
Diluted Shares Outstanding (mil)
Market Value of Equity
0.50%
8.28%
8.78%
3.00%
Percent Equity Weight
Percent Debt Weight
84.94%
15.06%
Cost of Debt
Cost of Equity
5.16%
9.17%
Tax rate
37.76%
WACC
8.28%
DCF Valuation
Discount Cash Flow
(Millions)
EBIT
Less: Taxes
Plus: Depreciation
Less: Capital Expenditures
Changes in Net Working Capital
Less: Increses in A/R
Less: Increases in Materials and Supplies
Plus: Increases in A/P
Free Cash Flow
Present Value
Sum of Present Value of FCF
Sources: UNP Factbook 2014
0
1
2
3
4
5
2015E
10,145
(3,687)
2,018
(4,435)
2016E
10,872
(3,953)
2,119
(4,420)
2017E
11,823
(4,302)
2,225
(4,733)
2018E
12,725
(4,632)
2,336
(5,037)
2019E
13,665
(4,976)
2,453
(5,354)
2020E
14,593
(5,316)
2,576
(5,669)
(37)
(41)
(102)
(47)
(124)
(57)
(120)
(55)
(126)
(57)
(124)
(57)
304
224
271
263
275
272
4,267
4,267
$98,937
4,692
4,314
5,104
4,314
5,481
4,258
5,879
4,199
6,275
4,120
Terminal
UNP expects to invest
around 16-17% of
revenue annually in the
capital planning program
111,884
73,465
Final Implied Price
Terminal Growth Rate
3.00%
Value Per Share
Sensitivity Analysis
98,937
2,358
(13,319)
87,976
Share Price
$103.26
Sources: Yahoo Finance!
Terminal Growth Rate
Discount Rate
(Millions, Excepts Share Price)
Enterprise Value
Plus: Cash
Less: Debt
Market Capitalization
$ 103.26
2.0%
2.5%
3.00%
3.50%
4.00%
7.78%
$107.15
$116.11
$126.93
$140.29
$157.19
8.28%
$97.80
$105.18
$113.97
$124.60
$137.72
8.78%
$89.82
$96.00
$103.26
$111.89
$122.32
9.28%
$82.95
$88.18
$94.25
$101.38
$109.85
9.78%
$76.96
$81.44
$86.58
$92.54
$99.54
Recommendation

Improving productivity

Favorable mix

EPS accretive share repurchase

Dividend Yield 2.2%

Presence at Mexico gateways
Relative
Valuation:
$95.13
Stock Price
Current
Stock
Price:$88.19
Sources: Yahoo Finance!
DCF
Valuation:$103.26
Recommendation:
BUY 100 shares
At current market
price
Stock Price

Potential challenges from crude,
ethanol and frac sands

Increased competition