UNION PACIFIC CORPORATION
OCTOBER 24, 2013
Alex Johansson, Dan Kleeman & Qianwen Wu
Agenda
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Introduction
Macroeconomic Outlook
Industry Overview
Company Overview
Earnings Report
Financial Analysis
Valuation
Recommendation
Macroeconomic Outlook

Increasing Growth of Shale
Sands
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Emerging Market in South
Inbound – Frac Sand & Pipe
Outbound – Crude Oil
Increasing U.S. Population Base

Stimulate Long-Term Growth
Source: 2012 10-K (Pg. 2)
Macroeconomic Outlook

Keystone XL Pipeline
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Proposed Pipeline to Relieve
Bottleneck Supply in Canada
Numerous Environmental
Concerns
Recent News

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
Permit Denied January 2013
Increasing Doubt of
Completion
No Decision Probably Till
2014
Source: Wall Street Journal
Macroeconomic Outlook
Industry Catalysts
Automotive
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Largest Automotive Carrier West of the Mississippi
Chemical – Shale Commodity Group
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Emerging Market – Offsets Decreased Coal Growth
Coal
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Coal Made Up 20% of 2012 Revenues
Decreased Growth Domestically – EPA & President Obama
Proposals
Indirect Growth Relationship w/Natural Gas Prices
Decreased Growth In Imports To China
We Proposed Minimal Growth In Our Model
Source: Wall Street Journal, 2012 10-K (Pg. 5 &23)
Industry Forces Analysis
Buyers
Power:
MEDIUM
Suppliers
Power:
HIGH
Rivalry:
MEDIUM
Threats of
Entrants:
LOW
Substitutes:
HIGH
Industry Forces Analysis
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Threat of Substitutes: High
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Bargaining Power of Buyers: Medium
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Other Alternatives Include Transportation Via: River
Barge, Trucking & Pipeline (Keystone XL)
Few Competitors
Many Alternatives
Threat of New Entrants: Low
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Very Capital Intensive  High Barriers of Entrance
Geographic specificity
Industry Forces Analysis
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Bargaining Power of Suppliers: High
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Very Little Pricing Power Over Fuel
Few Suppliers of Trains and Rail Supplies
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
Switching Cost May Be High
Rivalry among Competitors: Medium

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Limited Amount of Competitors
Specific to Service & Geographic Region
Comparison between Dow Jones
Railroad Index and S&P 500
Source: Google Finance
Company Overview
Source: Union Pacific Website
Company Overview – Commodity
Group Breakdown

Agricultural - Grains, Food & Beverage
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Coal - Coal & Petroleum Coke
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Revenue Decrease 2%
Volume Decrease 4% With 2% Increase in Average Revenue/
Car
Revenue Increase 2%
Volume Decrease 8% With 10% Increase in Average
Revenue/Car
Intermodal - International and Domestic Container
Traffic

Revenue Flat & Volume Decrease 1% With 2% Increase in
Average Revenue/Car
Source: 2013 3rd Quarter 10-Q (Pg. 23)
Company Overview – Commodity
Group Breakdown
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Chemical - Petrochemical, Shale & Fertilizer
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Industrial Products - Construction Products, Metals,
Minerals, Paper Consumer Goods, Etc.
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Revenue Increase 5%
Volume Decrease 3% With 2% Increase in Average Revenue/Car
Revenue Increase11%
Volume Increase 9% With 2% Increase in Average Revenue/Car
Automotive - Finished Vehicles & Automotive Parts
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Revenue Increase 17%
Volume Increase 8% With 9% Increase in Average Revenue/Car
Source: 2013 3rd Quarter 10-Q (Pg. 23)
Company Overview – Revenue
Breakdown

9 Months Ended September 2013
% of Revenue 2013
% of Revenue 2012
Agricultural
15%
17%
Automotive
10%
9%
Chemicals
17%
16%
Coal
19%
20%
Industrial Products
19%
18%
Intermodal
20%
20%
Source: 2012 10-K (Pg. 5), 2013 10-Q (Pg. 8)
Business Risk Analysis
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Seasonality
 Agricultural
Product (Harvesting Seasons) and
Intermodal (Peaks During 4th Quarter Holiday Season)
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Competition
 Other
Railroads, Motor Carriers, Ship and Barge
Operators and XL Keystone Pipeline

Fluctuation of Fuel Cost
 Minimal
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Pricing Power - Fuel Surcharge vs. Busines
Key Suppliers
2
Suppliers For Horsepower Locomotive & Rail
Source: Union Pacific 2012 10-K (Pg. 6 & 11)
Purchases
Business Risk Analysis
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Union Workers
 86% of Employees Are Members of One of 14 Major Rail
Unions
Dependence on Technology
 Maintain Newest Technology vs. Competitors
Railroad Security
 Required to Transport Hazardous Materials
Environmental Regulation
 Significant Costs to Investigate and Mitigate Environmental
Contamination
Weather Changes
Source: 2012 10-K (Pg. 6, 7, 8, 10)
SWOT Analysis
Strengths
Weaknesses
- Industry Leader
- Unionized Workers
- Diversified End Markets
- High Bargaining Power of
- Strong & Efficient Networks
Suppliers (2 Suppliers)
- $716M Underfunded
Pension
Opportunities
- Growth of Shale Market
- Investment in New
Technology & Equipment
(PTC)
- Increasing U.S. Population
Base (Long-Term)
Threats
- Substitutes (XL Pipeline,
Barges)
- Cannot Maintain Pricing
Power
- Governmental Regulations
Source: Marketline UNP Report
Strategy
Focusing on Creating Value for Our Customers By
Providing Safe, Efficient and Reliable Services.
 Continued Capital Investment to Support Long-Term
Functionality
 Expand Network in the South


Increase Shale Related Presence
Maintain a Diverse Franchise of Operations
Source: Union Pacific 2013 10-Q (Pg. 15), 2012 10-K (Pg. 2)
Management Outlook

Positive
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2012 Performance Reaches All-Time High
Diversified Portfolio of Business Providing Hedging Against
Each Other
Invest Intensively in Technology and Equipment Enhancement
Growth in the Southern Region of the Network (ShaleRelated Energy Arena)
Increase in U.S. Population Base
Concerns

Fuel Price Fluctuation
Source: 2013 3rd Quarter 10-Q (Pg. 15, 22), 2012 10-K (Pg. 2)
Recent News – Earnings Report

Earnings Report – October 17, 2013
 Record
Quarterly Earnings of $2.48/Share
From $2.19 2nd Quarter
 Net Income Increased to $1.2B From $1.0B
 Dividend Declared $0.79/Share
 Record Quarterly Operating Margin of 64.8%
 Flat Volumes With Increase in Core Pricing Power
Source: Union Pacific Website News Releases
Recent Financial Information
EBIT
Revenue
$8,000
$25,000
$7,000
$20,000
$6,000
$5,000
$15,000
$4,000
$10,000
$3,000
$2,000
$5,000
$1,000
$0
$0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Source: Union Pacific 2012 10-K (Pg. 20)
Recent Financial Information
Net Income
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2008
2009
2010
2011
2012
Source: Union Pacific 2012 10-K (Pg. 20)
Current Stock Information
Metric
Current Stock
Price
Trailing P/E
Forward P/E
Dividend Yield
Market Cap
($ millions)
Value
$154.90
17.08
14.44
2.00%
$71.52B
Source: Yahoo Finance
Financial Analysis
Current Ratio
Quick Ratio
Cash Ratio
Liquidity Ratios
2008
2009
0.98
1.37
0.64
0.94
0.43
0.69
2010
1.16
0.77
0.37
2011
1.12
0.79
0.37
2012
1.16
0.77
0.34
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
Profitability Ratios
2008
2009
22.65% 23.89%
12.99% 13.36%
5.88%
4.48%
16.14% 13.84%
2010
29.36%
16.39%
6.45%
11.82%
2011
29.27%
16.83%
7.30%
10.56%
2012
32.23%
18.84%
8.36%
9.77%
Debt/Assets
Debt/Equity
Interest Coverage
Solvency Ratios
2008
2009
22.47% 23.35%
57.79% 58.62%
7.96
5.63
2010
21.45%
52.03%
8.27
2011
19.75%
47.94%
10.01
2012
19.08%
45.26%
12.61
Source: Capital IQ
Financial Analysis
A/R Turnover
Days Sales Outstanding
Fixed Asset Turnover
Total Asset Turnover
Activity Ratios
2008
2009
30.25
21.24
12.07
17.19
0.49
0.37
0.45
0.34
2010
14.33
25.47
0.43
0.39
2011
13.96
26.15
0.47
0.43
2012
15.72
23.22
0.48
0.44
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
DuPont Analysis
2008
2009
63.96% 63.55%
89.71% 88.01%
22.65% 23.89%
45.24% 33.53%
2.57
2.51
15.12% 11.25%
2010
62.71%
89.00%
29.36%
39.37%
2.43
15.65%
2011
62.54%
91.96%
29.27%
43.37%
2.43
17.72%
2012
62.41%
93.67%
32.23%
44.38%
2.37
19.84%
Source: Capital IQ
Stock Performance
Source: Yahoo Finance
Comparable Company Analysis
Data as of 10/23/2013 Close
Company Name
Union Pacific Corporation
Ticker
UNP
Canadian National Railway Company
Canadian Pacific Railway Limited
CSX Corp.
Kansas City Southern
Norfolk Southern Corporation
TSX:CNR
TSX:CP
CSX
KSU
NSC
Price
Shares Outstanding Equity Value Enterprise Value
$ 154.90
468.6
71,342.1
79,431
$ 110.42
$ 143.12
$ 26.17
$ 123.66
$ 86.06
426.5
176.0
1,022.8
110.3
317.1
46,452.1
25,063.8
26,527.8
13,628.4
26,846.7
Source: Capital IQ
53,502
29,341
34,880
15,625
34,789
Comparable Company Analysis
Multiple
High
Median
Mean
Low
Multiple
UNP Satistic
High
Median
Mean
Low
Multiple
High
Median
Mean
Low
Comparison Statistics
Price/Book Value Forward EV/Sales Forward EV/EBITDA Forward P/E
4.31
5.84
13.70
24.88
4.16
4.45
10.21
16.29
3.58
4.17
10.02
17.55
2.58
2.84
7.38
13.66
Price/Book Value
45
98,226
94,927
82,913
61,981
Comparables Summary
Enterprise Value
Forward EV/Sales Forward EV/EBITDA Forward P/E
Multiple
Weight
Share Price
Price/Book Value
25% $
161.52
23,039
9,897
10
Forward EV/Sales
25% $
189.87
134,575
135,539
127,695
25% $
196.63
102,476
101,086
86,347 Forward EV/EBITDA
Forward P/E
25% $
182.00
96,070
99,211
92,419
$
182.51
65,360
72,987
73,678 Calculated Share Price
Price/Book Value
$
194.51
$
187.40
$
161.52
$
116.43
Share Price
Forward EV/Sales
$
272.81
$
203.67
$
189.87
$
123.71
Forward EV/EBITDA
$
274.89
$
200.67
$
196.63
$
140.14
Forward P/E
$ 257.99
$ 168.92
$ 182.00
$ 141.63
Source: Capital IQ
Discount Rate
CAPM
Risk-Free Rate
3.50%
Market Risk Premium 6.00%
5-Year Beta
0.73
CAPM Cost of Equity
7.89%
Annual Realized Returns
Year
Return
1
25.57%
2
26.50%
3
12.86%
4
49.51%
5
1.51%
Total Realized Return
Arithmetic Annual Return
Geometric Annual Return
Source: Capital IQ
172.08%
23.19%
22.16%
Discount Rate
Weighted Average Cost of Capital
Share Price
Fully Diluted Shares Outstanding
Market Value of Equity
Debt
$ 152.10
464.200
70,605
8,997
Percent Equity Weight
Percent Debt Weight
88.70%
11.30%
Cost of Debt
Cost of Equity
CAPM Cost of Equity
UNP Realized Return
Cost of Equity
5.95%
7.89%
22.16%
12.88%
Tax rate
37.50%
WACC
11.85%
65.00%
35.00%
Source: Capital IQ
DCF Analysis
UNP Discounted Cash Flow Analysis
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
2013
7,860
(2,668)
2,260
(4,269)
2014
8,801
(2,974)
2,934
(4,400)
2015
9,659
(3,251)
3,664
(4,330)
2016
10,653
(3,579)
4,112
(4,486)
2017
11,957
(4,017)
4,615
(4,196)
(176)
(131)
969
3,846
3,438
(254)
(133)
655
4,629
3,700
(238)
(125)
616
5,994
4,284
(244)
(128)
631
6,959
4,447
(275)
(144)
709
8,650
4,942
Discount Rate
Terminal Growth Rate
11.85%
3.00%
Enterprise Value
Less: Debt
Plus: Cash
Market Capitalization
78,339
(8,997)
1,063
70,405
Share Price
$
151.67
Terminal
100,699
57,528
Decision Drivers

Strengths

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Record Operating Margin of 65%
Record Quarterly Earnings of $2.48/Share & Record
Quarterly Dividend of $0.78/Share
Industry Diversification – Growth of Shale
Automobile Industry Resurgence
Concerns


Decrease in Coal Growth
Crude Oil Fluctuations
Source: Union Pacific Website News Releases,
2012 10-K (Pg. 2)
Recommendation

Valuation Summary




Current Stock Price: $154.90 Per Share
Comparable Companies Valuation: $182.51 Per Share
DCF Valuation: $151.67 per share
Recommendation: HOLD



Diversified Competitive Position
Stock is Fully Valued
Positive Macroeconomic Outlook
Questions?