Should You Buy Union Pacific Stock At $220?

UNP: Union Pacific logo
Union Pacific

Union Pacific stock (NYSE: UNP), which currently trades at $221 per share, looks like a good investment opportunity. The stock is down 11% year-to-date, slightly outperforming the broader S&P 500, which remains down by about 14% over the same period.

There are a couple of trends driving the stock lower of late. The demand for railroad business can primarily be linked to economic growth. The current high inflationary environment, rising interest rates, and recession fears have weighed on railroad stocks. Some prominent Wall Street analysts have recently downgraded their rating on Union Pacific, citing the concerns over economic growth.

Looking at some of the individual segments, Premium (includes automotive shipments and intermodal business) volume is still lower than pre-pandemic levels, given the semiconductor chip shortage in the automotive industry. In the plus column, coal has a positive momentum on its side with rising production in the U.S. and increased global demand due to higher natural gas prices. In fact, Q1 2022 coal and renewables revenue was up a solid 49%, driven by a 29% rise in volume and a 16% jump in average revenue per carload. Union Pacific has managed to grow its average revenue per carload for all the segments in the recent past, which has been the company’s key revenue growth driver. The company managed to bring its operating ratio down to 57.2% in 2021, compared to 59.9% in 2020 and 60.6% in 2019. As of Q1 2022, the figure declined 70 bps y-o-y to 59.4%.

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Now, the concerns around economic growth are genuine, and railroad companies may likely see some pain on the demand side over the next few quarters. However, we remain bullish on UNP stock, especially given the recent correction. At current levels of around $221 per share, UNP stock trades at under 19x projected 2022 earnings of $11.89 on a per-share basis, which compares with an average of over 22x in the last three years. Given its ability to garner higher revenue per carload, we don’t expect a significant impact on the company’s operating ratio in the near term. We value UNP stock at about $270 per share, which is roughly 22% ahead of the current market price. See our analysis on Union Pacific ValuationExpensive or Cheap for more details on what’s driving our valuation for the company. Also, see our analysis on Union Pacific RevenueHow Does Union Pacific Make Money for more details on the company’s key revenue streams and how they have been trending.

While UNP stock looks undervalued, it is helpful to see how Union Pacific’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for CSX vs. Simpson Manufacturing.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jun 2022
MTD [1]
YTD [1]
Total [2]
 UNP Return 1% -12% 113%
 S&P 500 Return -1% -14% 83%
 Trefis Multi-Strategy Portfolio 0% -19% 219%

[1] Month-to-date and year-to-date as of 6/2/2022
[2] Cumulative total returns since the end of 2016

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