Despite a 14% fall year-to-date, we believe Union Pacific stock (NYSE: UNP) has little room for growth. UNP stock rose from under $250 in early January to over $275 towards the end of March before falling to $217 now. The YTD 14% fall for Union Pacific aligns with the -14% returns for the broader S&P500 index and its peers, CSX stock and Norfolk Southern stock, both down over 13%. Looking at the longer term, Union Pacific stock is up 57% from levels seen in late 2018, compared to around 65% returns for the S&P500 index.
This 57% rise for UNP stock since late 2018 was driven by: 1. the company’s P/S ratio, which rose 25% to 5.9x trailing revenues from 4.7x in 2018, 2. Union Pacific’s revenue, which grew 7.5% to $23.0 billion over the last twelve months, compared to $21.4 billion in 2018, and 3. a 15% fall in its total shares outstanding to 621 million, driven by share repurchases of around $17 billion between 2019 and 2021. Our interactive dashboard, Why Union Pacific Stock Moved, has more details.
Union Pacific’s freight revenue declined 5.3% between 2018 and 2021, as a 4.9% rise in average revenue per carload was more than offset by a 9.8% decline in the volume of carloads over this period. However, 2022 has been good so far, and we forecast a significant 15% jump in freight revenue, driven by an expected 13% y-o-y rise in average revenue per carload and a 2% growth in the volume of carloads.
Furthermore, the company has been consistently improving its operating ratio, which fell to 57.2% in 2021, compared to 61.2% in 2018. However, given the higher inflation, costs have been higher this year, and the operating ratio has risen by 280 bps y-o-y to 59.9% for the nine months ending September 2022. The company’s bottom line increased 26% to $9.95 in 2021, compared to $7.91 in 2018, and we expect it to rise to $11.61 in 2022. This is much better than the company’s expected revenue decline of 4.5% over this period, primarily due to better operating margins and share buybacks.
Looking forward, there are near-term headwinds for the company. 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. Furthermore, there have been concerns about a railroad strike, as the unions have not been able to negotiate their labor contracts with the companies. The strike is averted now with the House of Representatives voting to impose a tentative contract deal that was reached in September, but some key unions did not accept that deal.
Looking at valuation, we find that UNP stock has little room for growth. We estimate Union Pacific’s valuation to be $232 per share, reflecting less than a 10% upside from its current market price of $217, implying that investors are likely to be better off waiting for a dip to enter UNP stock for more gains in the long-term. Our price estimate of $232 is based on a 20x forward earnings estimate of $11.61 per share, compared to the last four-year average of under 21x.
While UNP stock looks appropriately priced, 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, CSX stock has fallen 14% 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%||-14%||82%|
|Trefis Multi-Strategy Portfolio||0%||-17%||227%|
 Month-to-date and year-to-date as of 12/1/2022
 Cumulative total returns since the end of 2016