VALUATION HIGHLIGHTS

1. Industrial Freight constitutes 35% of the Trefis price estimate for Union Pacific Corporation's stock.
2. Premium Freight constitutes 30% of the Trefis price estimate for Union Pacific Corporation's stock.
3. Bulk Freight constitutes 29% of the Trefis price estimate for Union Pacific Corporation's stock.

WHAT HAS CHANGED?

1. UNP Stock Performance
   • UNP stock has witnessed gains of 15% from levels of $210 in early January 2021 to around $245 now (Jan 30, 2024), vs. an increase of about 30% for the S&P 500 over this roughly 3-year period.

     However, the increase in UNP stock has been far from consistent. Returns for the stock were 21% in 2021, -18% in 2022, and 19% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that UNP underperformed the S&P in 2021 and 2023.

2. Q4 2023 Performance
   • Union Pacific's top line remained flat y-o-y at $6.2 billion in Q4 2023, as a 3% rise in total volume was offset by a 3% decline in average revenue per unit.

     Looking at the bottom line, the company posted a 1% rise in its EPS, which stood at $2.71 per share, partly due to a 10 bps contraction in the operating ratio.

3. Impact of Covid-19 On Union Pacific's Stock
   • Railroad companies saw sales and earnings decline in 2020. The Covid-19 crisis hurt railroad demand due to an overall decline in manufacturing, lower consumer demand, lower oil prices impacting production and transportation of oil and related products, as well as lower natural gas prices resulting in lower demand for coal.

     However, the situation reversed in 2021, with economic growth led by a rise in vaccination rate and a surge in oil prices. This led to an increased demand for railroads. Furthermore, the trucking industry continues to combat the driver shortage issue, and this has resulted in some movement of business to the railroads (intermodal).

     2022 turned out to be challenging, with higher inflation, rising interest rates, and slowing economic growth. This has meant higher costs for railroad companies and a lower volume of carloads.

4. Trends In Coal Shipments
   • With the increased use of cleaner sources of energy, such as natural gas, the demand for coal has dropped drastically over the last few years. Consequently, coal shipments have witnessed a sharp decline in recent years. However, if there is any sharp movement in natural gas prices, it would result in higher coal demand.

     In 2018, utility coal shipments remained sluggish, while the coal export saw a strong uptrend, given the overall coal prices and demand in international markets. Exports weakened in 2019, and with natural gas prices falling sharply in 2020, coal demand has also declined. That said, 2021 and 2022 saw a rise in natural gas prices, sending the coal demand higher.

5. Slowdown In Automotive
   • 2017 to 2019 saw the demand for light vehicles slow down, despite large discounts being offered by manufacturers to clear their previous inventories. This is primarily because the pace at which cars or trucks are being purchased is not the same as the pace at which they are being replaced. Consequently, there is a void in demand for these vehicles, which is visible from the decline in their sales. The 2020 coronavirus crisis resulted in several automotive plants being closed or operating at a low capacity for a few months in 2020, thus impacting the overall output. Even post-pandemic, the automotive sector struggled with the semiconductor chip shortage issue weighing on overall production. Since the railroad sector is closely correlated to the automobile industry, companies such as Union Pacific have witnessed a decline in auto shipments in the recent past.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Union Pacific's value that present opportunities for upside or downside to the current Trefis price estimate:

• Union Pacific's EBITDA margin: We currently forecast Union Pacific's EBITDA margin to increase slightly from 49% in 2022 to a little over 54% by the end of the Trefis forecast period, driven by the company's productivity improvement initiatives.
  There could be a downside of over 10% to the Trefis price estimate if the company cannot expand its margin, and it falls to 47% by the end of our forecast period, as opposed to rising to 54% in our base case forecast.

Industrial Freight

• UNP's Industrial Carloads: We currently forecast UNP's Industrial carloads to rise from 2.2 million in 2022 to 2.7 million in 2029. However, a strong recovery could significantly boost the overall industrial output in the country. If UNP's Industrial carloads rise to over 4.0 million by the end of our forecast period, as opposed to 2.7 million in the base case, it will imply over 10% upside to our price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Union Pacific at the top of the page.

BUSINESS SUMMARY

Union Pacific Corporation is the leading railroad network in the United States, primarily in freight transportation. Union Pacific Railroad (UPRR), the largest class-1 railroad in the United States, is the core subsidiary of Union Pacific Corporation. UPRR's route map covers most of the central and western United States, west of Chicago and New Orleans, covering nearly 23 states. Union Pacific competes with Burlington Northern Santa Fe Corporation (BNSF), which covers much of the same territory.

The company-owned tracks are a significant strength of Union Pacific. The company operates on 32,534 miles of track, of which 26,094 is owned, and the remainder is under trackage rights or leases. Union Pacific operates on crucial north/south corridors and is the only railroad to serve all six major gateways to Mexico. UP also interchanges traffic with the Canadian rail systems.

Union Pacific Railroad Company's business mix includes Agricultural Products, Automotive, Chemicals, Energy, Industrial Products, and Intermodal. Although the company's primary role is transporting freight, it also runs a substantial commuter train operation in Chicago.

Union Pacific's earnings depend upon the volume of freight contracts it sells and the price of those contracts. Its expenses primarily consist of labor, fuel, utility, and track maintenance. The largest of Union Pacific's customers include steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies, and chemical manufacturers.

SOURCES OF VALUE

Industrial Freight is the most significant contributor to Union Pacific's value.

Well connected to major industrial hubs

Union Pacific's rail network links the major U.S. industrial hubs in the Midwest and the Western U.S. to export terminals in the Pacific Northwest, the Gulf Coast, and Mexico. In addition, the company also serves major domestic markets in the Midwest, West, South, and Rocky Mountain states. The company is well placed to benefit from the U.S. industrial output and its competitiveness in international markets.

KEY TRENDS

Rebound in coal shipments

An increase in natural gas prices in 2017 boosted the share of coal in U.S. electricity generation. Coal benefited from higher exports in 2018. However, coal shipments remained sluggish in 2019 and 2020. That said, 2021 and 2022 saw a rise in natural gas prices, sending the coal demand higher.

However, natural gas prices have seen a significant fall from $4 at the beginning of 2023 to a little over $2 mid-year, and almost $3 currently, due to falling crude oil prices and recession fears. This will likely weigh on coal shipment for railroads in the near term.