Union Pacific stock (NYSE: UNP) has seen an 11% fall this year, performing slightly better than the broader S&P500 index, which is down 17%. 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, fears of slowing economic growth, and weakness in the broader markets have weighed on railroad stocks, including UNP.
Looking at the longer term, UNP stock is up 67% from levels seen in late 2017. This marks an in-line performance with some of its peers, including CSX stock, which rose 73%, and Norfolk Southern stock, up 68% over this period. This compares with the 48% rise for the broader S&P 500 index.
This 67% rise for UNP stock since late 2017 can primarily be attributed to 1. the company’s P/S ratio rising 19% to 6.0x trailing revenues, from 5.0x in 2017, 2. Union Pacific’s revenue growth of 10% to $23.4 billion over the last twelve months, compared to $21.2 billion in 2017, and 3. a significant 22% fall in its total shares outstanding. Union Pacific has spent a whopping $28 billion on share repurchases since the end of 2017, resulting in a 22% decline in its total shares outstanding, bolstering its revenue per share metric, which rose 41% to $37.45 now, compared to $26.60 in 2017.
Union Pacific’s revenue growth over the recent years has been driven by higher average freight revenue per carload, which grew 9% to $2,519 in 2021, compared to $2,310 in 2017, offsetting a decline of 6% for the total number of carloads to 8.0 million from 8.6 million over the same period.
The company has seen a rebound in railroad demand over the last year or so. Looking at some of the individual segments’ performance in the recent past, Premium (includes automotive shipments and intermodal business) has seen its volume decline due to the semiconductor chip shortage and supply chain disruptions in the automotive industry weighing on the overall production. However, 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, in the first half of 2022, coal and renewables revenue was up a solid 31%, driven by a 15% rise in volume and a 14% jump in average revenue per carload.
Although the company managed to bring its operating ratio down to 57.2% in 2021, compared to 61.2% in 2021, higher inflation in 2022 has led to an increase in the metric to 59.8% in the first half of 2022, reflecting over a 200 bps y-o-y rise. However, as we look forward, inflation is expected to ease over the coming quarters, likely resulting in a better operating ratio for Union Pacific.
We estimate Union Pacific’s valuation to be $250, reflecting an 11% upside from its current levels of $225. Although UNP stock is trading at a higher P/S multiple than the levels seen in 2017, it is largely justified, given the company’s ability to cut its operating ratio and robust returns to shareholders with massive share buybacks.
While UNP stock looks like it has some more room for growth, 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 at how counter-intuitive the stock valuation is for CSX vs. Amerco.
With inflation rising and the Fed raising interest rates, among other factors, UNP stock has fallen 11% this year. Can it drop more? See how low Union Pacific stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||0%||-17%||77%|
|Trefis Multi-Strategy Portfolio||0%||-16%||236%|
 Month-to-date and year-to-date as of 9/1/2022
 Cumulative total returns since the end of 2016