Business overview. Union Pacific Corporation’s customers are manufacturers who hire bulk shipments of agricultural, automotive, chemical, energy, industrial, and intermodal freight from coast-to-coast and border-to-border of the U.S.A.
Business operations. Profits depend on attracting customers with efficient service at competitive prices. Profits decline when economic downturns reduce customer demand for shipping, the cost of locomotive fuel rises, or work is stopped by unions/disasters. Profits depend on factors that include efficient freight operations, locomotive fuel efficiency, and high customer satisfaction. The highest costs of operation are fuel and employee entitlements (48,000 full-time employees who are highly unionized). Suppliyes of train equipment are constrained by the availability of locomotives and tracks.
Strategy for growth. The company grows operations by adding double-, triple-, and quadruple- tracks to its busy corridors; also by upgrading and increasing its terminal capacity.
Industry/market. Railroads ship ~40% of all surface freight in the U.S. (largest portion of total surface freight) and freight rates (revenue per ton-mile) have decreased by ~50% since 1981. The leading railroad revenue companies in North America (Burlington, Canadian National, Chesapeake, Union Pacific) primarily finance their assets with debt and maintain debt/equity ratios of 1.5-3.1. They uniformly invest in capital expenditures for upkeep and consistently earn profits, of which 25% are paid out as dividends.
Competitive advantage. Railways provide the safest form of ground transportation within the freight industry. Union Pacific is a class 1 railroad that operates 32 thousand route miles (26K owned, 6K leased) of railways. It is tied with Burlington R.R. for being the largest earners of revenue from shipping rail freight within the U.S.A. Highway trucks offer competition in all commodity segments except energy, are able to ship time-sensitive freight, but unable to ship bulk quantity. River barges are competitors for grain and bulk commodities.
Risks. The risks to earning profits are high fuel costs, bad economic conditions (may reduce demand for freight transportation), interruption of operations (weather, technology failure, strikes), changes in regulations (environmental regulations, government regulations), an interrupted supply of equipment, and accidents (personal injury, hazardous material spills).
Stock valuation. Stock ticker UNP:nyse represents a large-growth stock that offers consistent dividends and corporate earnings. I estimate the investment potential is a 10% return based on consistent earnings and dividends (2% yield). Standard & Poor’s credit rating is BBB+.
2011 Outlook. The 4th quarter is likely to be the busiest time of the year for railroad freight and high fuel costs will make railroads more competitive than trucks. These predictions could be offset by the sluggish economy.