Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March 2020 helped the markets stage a strong recovery. Now with vaccination programs underway since Q2 2021, investors are now expecting a quicker economic rebound with economies opening up gradually, which will bode well for Union Pacific's transportation business.
Overall, 2020 saw sales and earnings decline for railroad companies. The Covid-19 crisis had a significant impact on transportation 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, situation has reversed so far in 2021, with economic growth led by increased vaccination rate, and a surge in oil prices has led to an increased demand for railroad. Furthermore, there continues be driver shortage for the trucking industry, and this has resulted in some movement of business to railroad (intermodal).
Below are key drivers of Union Pacific's value that present opportunities for upside or downside to the current Trefis 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.
Union Pacific Corporation is the leading railroad network in the United States, engaged 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 major strength of Union Pacific. The company operates on 32,340 miles of track out of which 26,094 is owned and the remainder is pursuant to trackage rights or leases. Union Pacific operates on key 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, while its expenses primarily consist of labor, fuel costs, utilities costs, and track maintenance. The largest of Union Pacific's customers include steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies, and chemical manufacturers.
Industrial Freight is the largest contributor to Union Pacific's value at around 35%.
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.
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. In the medium to long run, favorable policy support from the U.S. government could boost shipments from the recent lows. Furthermore, the recent surge in natural gas prices (2021) will result in an increased demand for coal.