Will Union Pacific Survive the Weakness?

Union Pacific (UNP) is in bad shape on account of the weakness in the end market. The railroad company reported continued sequential and year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment, eating into the margins of the company.

Union Pacific is continuously witnessing contraction in both its top and bottom lines owing to a major decline in the company’s volume growth for the quarter which is driven by the ongoing weaker global commodity demand and pricing scenario, putting the company’s margins under pressure.

Some positives

The railroad company is illustrating continued year-over-year improvement in service delivery, IS&P, velocity and dwell by utilizing franchise strengths, strategically operating in a dynamic environment and focusing on further enhancing services and minimizing costs.

Union Pacific is targeting on improving its service delivery by minimizing the goods dwelling and delivery time while steadily enhancing the velocity to carry goods along with a well-diversified portfolio of goods being transported to sustain healthy margins.

The railroad company is uniquely optimizing free cash flow from operations by strategically managing year-over-year investing cash flows and expanding annual dividends while only slightly growing its overall debt with continued reduction in operating ratio performance over the years and well in line with the target of achieving a full year operating ratio performance of somewhat 60 by 2019.
In addition, Union Pacific has a robust balance sheet with an investment grade credit rating and $2.25 billion of year-till-date debt issuance.

Positive steps  

Union Pacific is keen on sustaining healthy cash position by expanding the diversified set of transported products to deliver sustainable and strong year-over-year growing company margins while driving robust shareholder value by impressively growing its share buyback program and delivering attractive dividends. Union Pacific has repurchased 13.8 million shares during the third quarter of 2015 and bought back 28.7 million shares year-till-date with approximately 59 million shares remaining under the current buyback authorization. Since the fiscal year 2014, the company has returned over 22% of cash to its key stakeholders for 2015 year-till-date.

The planned approach of the key railroad company towards improving its cash position, optimizing debt obligations while leveraging free cash flows for strategic share repurchases and timely dividend distributions is expected to drive sustained long-term profitability for the company, benefiting the key stakeholders.

During 2016, the growth prospects for the global transportation industry appears extremely positive with rail experts remaining hugely optimistic regarding the global conditions to get better with reduced volume in carloads and allowing the railroad industry to enhance its overall services. The already strong demand for truck drivers is estimated to continue, driving solid demand for rail services. Going forward into 2016 and further, the rail and intermodal outlook seems mixed with intermodal witnessing continued market share expansions locally and globally whereas rails estimated to be much more crucial in the entire supply chain compared to the current situation.


Overall, the investors are advised to “Buy” equity in Union Pacific Corporation considering the company’s logical valuation with trailing P/E and forward P/E ratios of 12.79 and 12.65 respectively and comparable to the industry’s average P/E of 17.04. The PEG ratio of 1.89 indicates healthy company growth and comparable to the industry’s growth average of 1.76. The profit margin of 22.35% also seems impressive. However, Union Pacific needs to optimize its debt-burdened balance sheet with significant total debt of $13.32 billion against weaker total cash position of $1.08 billion only, restricting the company to continue its daily operations profitably.
Published on Apr 6, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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