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STATE OF THE RAILROAD

Union Pacific and CSX Company Analysis

JUAN MANUEL SEGURA

ACCOUNTANCY 20100

8/3/2011

EDWARD F. HUMS


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TABLE OF CONTENTS

1.) HISTORY OF THE RAILROADSa. GENERAL HISTORY3

b. UNION PACIFIC4

c. CSX..8

2.) UNION PACIFIC FINANCIALSa. INTRODUCTION11

b. INCOME STATEMENT..12

c. BALANCE SHEET..16

d. STATEMENT OF CASH FLOWS..22

3.) CSX FINANCIALSa. INTRODUCTION....24

b. INCOME STATEMENT...25

c. BALANCE SHEET...28

d. STATEMENT OF CASH FLOWS....33

4.) CONCLUSIONa. SEGURA EQUITY SOLUTIONS REVIEW.....35


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HISTORY OF THE RAILROADS

GENERAL HISTORY

The rail road industry in the United States has its roots in the early 19 th century whenJohn Stevens made an experimental track around his property work. After this successfuldemonstration case, his work would be replicated though out the east coast, developing a railroad fever. In 1829, Horatio Allen implemented a steam locomotive made for a 16 mile track forDelaware & Hudson Canal Company. Their first locomotive, the Stourbridge lion, was usedprimarily to haul coal from mines in Carbondale to Honesdale.1

The famous Tom Thumb locomotive, hailed for its historical appearance and influence inthe railroad industry, was implemented by the South Carolina Canal & Road company and it wasdesigned by Peter Coopery. This company was also the first to build a locomotive to carry

passengers on Christmas day in 1830. Through a series of charters and acquisitions, railroadingsoon struck the hearts and imaginations of Americans as an efficient way of transporting goodsand services.2

By the early 1840s, talk of a transcontinental railroad came into being. Asa Whitney, afamous and well known speculator, proposed that congress give a charter of 60 miles of trackthrough its public domain in order to finance the operation.Whiteny proposed that wages be paid in land, facilitatingthe movement west and acquiring cheap labor from recentimmigrants such as the Irish and the Germans. Because ofbitter disputes consisting of exactly where the railroad

would run through, Congress never took action on theproposal. Despite Whitneys failure, his ideas started fiercenational discourse over the idea of there being atranscontinental railroad. Through a series of explorationsand surveys done by merchants and prospective investorsin the railroad industry, Abraham Lincoln in 1862 wasconvinced of the need for a transcontinental railroad andenacted the Railroad Act of 1862.3

In 1869, completion of the transcontinental railroad signaled new opportunities for thenation as a whole. In 1870, a person could travel through the country in a week instead ofmonths, demonstrating how social mobility both through the country and opportunity began tobenefit all people involved in the operation of the railroads in the United States. New trains

1 "Railroad History, An Overview Of The Past." The American Railroads. Americanrails.com. Web. 23 July 2011.

.2 ibid3 "History of Railroads and Maps." Memory.loc.gov. Library of Congress. Web. 23 July 2011.

.


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harnessing the power of steam such as the Neptune and Jupiter became the engines that propelledrailroading companies such as the Santa Cruz Railroad company to expand. The industryexpanded so much that by the 1890s, 163,000 miles of track have been laid and in use. Suchdevelopments that emerged from this period was the introduction of the standard track of 4 feet,8 inches and the air brake. Below is a graph demonstration the progression of track mileage in

the United States since its inception in the early 19

th

century

4

:

1840 1860 1870 1890 1900 1916 1945 1963 1995 Today

2,808 30,000 52,922 163,597 193,346 254,027 226,696 214,387 170,000 160,000

Up through the 1920s railroads reached their zenith in profitability in terms of bothpassenger and freight transport. From this period onwards, however, locomotive track has beenin decline due to the rise of the automotive industry. World War 2 is considered one of the lastgreat runs of the railroad industry before the national highways were created and really made ablow to the rail road companies market share. Up till then, rail road companies have beeninvesting heavily in passenger luxury trains in an attempt to sway passengers back5.

By the end of the 1950s, smaller rail companies have been disappearing, beingconsolidated by larger rail companies. It was at this point in the period of the 1960s and 70sthat the government entered into the rail industry in order to revitalize the rail road industry.Conrail made its debut in 1976, and even before that in 1971, Amtrak became the biggestprovider of passenger rail6.

The industry witnessed massive deregulation in the early 1980s by virtue of the StaggersRail Act. Before this point in time, many, if not most of the rail companies were subject to

government mandated rates and other similar provisionsdenying the rail companies in being flexible to adapt to anymarket changes. Thanks to the Staggers Rail Act, most ofthese decisions returned to the rail companies and majorconsolidations occurred bringing about major railcompanies such as the Burlington Northern Santa Fe, CSX,and several acquisitions done by Union Pacific andNorthern Sulfux.

Union Pacific History

Union Pacific was formed with the idea of connecting both the east and west coasts of theUnited States. 7With the ratification of the Pacific Railroad Act of 1862, President Abraham

4 Rail Road History5 ibid6 ibid7"Union Pacific Corporation -- Company History." Find Funding with Banks, Investors, and Other Funding Sources |

FundingUniverse. Web. 23 July 2011. .


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Lincoln authorized, through both economic and military necessity, the public corporation ofUnion Pacific Railroad Company to build track to the Nevada California border where it would join tracks with Central Pacific Railroad Company. The countrys ambitious effort to connectboth coasts of the Americas would only be possible with government intervention in the form ofthe issuance of bonds. The U.S government agreed on bonds to be paid back in 30 years. In

addition, the railroad company would acquire land grants worth 6,400 acres. In retrospect,despite Union Pacific being created as a public corporation, it would primarily be driven by theprivate sector.8

Leadership within the company consisted of individuals such as Thomas C. Durant andthe Ames Brothers. Because the company had a responsibility to its shareholders, Durant andothers were able to form a construction company by the name of Credit Mobiler of America(CMA). In retrospect, it appears as though this was the most effective way for the leaders of thecompany to funnel off exorbitant profits under the nose of the government and Union Pacificsshareholders. Despite this rampant corruption within the company, the project was completedwhen in 1869, the golden spike was nailed into the finished railroad on 1,000 miles of trackbetween Nebraska and Utah territory to commemorate the historical significance of the event 9.

The importance of this event can be seen in therapid migration west by farmers, ranchers,manufacturers and others seeking fame andfortune out west. For 15 years United Pacificdominated the scene and handsome profitswere made by investors. Their dominancewould range from 1873 to around 1885 by JayGould. Gould oversaw the rapid expansion ofUnion Pacific through the territories whichamounted to an outstanding exapansion.10 .

Unfortunately for the company, Gould paid out huge dividends in 1878, the majority ofwhich he owned, and sold his share for large profit. Because of his actions, the companystruggled to raise enough money for the government debt they owed that had its maturity in1895. In 1884, Charles Francis Adams took charge of the company; however, because of thecompanys past activities, Adams did not have the full confidence of the public and mostimportantly of congress11.

Not only did the company have this debt to handle, they had to weather the panic of1893. By this time, three rival railroading companies have been cutting away at the operatingincome of the company, making UNP lose its market power it once had full reign over. In 1893the company went into government receivership due to its inability to pay off its governmentdebt, but the New York investment banking house of Kuhn, Loeb, and Company was able toraise the necessary capital to pay off the government debt in 1897. They sold the company toanother rail company which could carry the same name as its predecessor. Edward Harriman was

8 ibid9 ibid10 ibid11 ibid


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chosen to lead Union Pacific that would become part of the remarkable leadership that wouldlead Union Pacific successfully into the 20th century12.

Harriman, until his death in 1909, expanded thecompanys lines from 2000 to 6000 miles of track. Healso bought out Southern Pacific, which in turn madeUnion Pacific and Southern Pacific one entity andmonopolistic enterprise. Harriman was able totemporarily merge with Northern Pacific and GreatNorthern Railroad, controlling vital lines coming in andout of Chicago. This realization was short lived when theSupreme Court ordered that the company dissolve in

1904. Despite the split, Union Pacific left the deal with 20% of both Northern Pacific and GreatNorthern13.

With his new holdings in cash, Harriman reinvested the majority of new found netincome into renovations of the company. In 1913, the Supreme Court dissolved the companys

holding of Southern Pacific on the premise that it was inhibiting competition. Though Harrimandied before he saw these events take place, he oversaw the expansion of Union Pacific in anunprecedented period of growth which would become a model for other railroading companysin the future to look on14.

From the beginning of the 20th century tillthe era of WWII, Union Pacific experiencedtremendous growth. From revenue in 1916 of $100million, the company increased revenue by morethan double that amount to $211 million in 1923.Over the next couple of decades, Union Pacific

became witness to steady increases in overallgrowth thanks to its oil and gas holdings, excellentperformance in freight and passenger transport, andhaving key investments in prime real-estate. The rapid expansion of the automotive industry inthe 1930s made a dent in the companys earnings, resulting in earnings amounting to $125million. Despite this slowdown, the company invested in key diesel locomotives and with theadvent of World War 2, Union Pacific experienced rapid expansion and growth, employing morethan 60,000 personnel, leaving an impact of continual expansion and growth well after the war ofmore than $500 million in revenue15.

In the mid 1950s, the company lost freight revenue to the trucking industrymade Union Pacific lose most of its revenue that it had earned in the last four decades. Througha process of restructuring, the company was able to focus its energies in three key markets;mineral, oil and gas exploration. Through the purchase of Champlin Petroleum Company andPontiac Refineries, Union Pacific was able to fully realize its oil and gas initiative. Frank Barnett

12 ibid13 Ibid14 Ibid15 Ibid


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oversaw this process of Diversification of Union Pacific in 1967. In 1969, Barnett turn thecompany into a holding company, where Union Pacific Railroad would become one of thesubsidiaries of the newly founded Union Pacific Corporation. The companys revenue reached$4 billion in the early 1970s due to the oil crisis alongside its coal reserves too16.

In 1962, Union Pacific participated in a merger with Chicago, Rock Island & PacificRailroad, which was taken apart by the ICC in 1980 where most of the lines that the companyowned were sold to other railroading companies. These included Missouri Pacific and Missouri-Kansas-Texas Railroad17.

With the advent of deregulation reform in the 1980s, Union Pacific acquired MissouriPacific and Western Pacific railroads. This acquisition resulted in an additional 11.500 miles oftrack in several states consisting of Texas, Missouri, and Oklahoma. The main drive UnionPacific had in this consolidation was gain in access to the coveted Chicago rail lines, which it hasbeen denied for most of its existence. Despite profits being up by 30%, the newly obtainedcompanies presented Union Pacific with too many workers in the sense that all of the operationswere crowded. Through a series of massive layoffs and restricting maneuvers by the company,

Union Pacific was able to cut 12,000 employees, increasing productivity tenfold18.

As noted previously, Union Pacific has been in constant competition not only with rivalrail road companies, but with the trucking industry in particular. The consolidated the disparitybetween the two industries, Union Pacific bought Union Pacific Corporation in 1987. Anothercompany Union Pacific bought shortly after entering the trucking industry was Missouri-Kansas-Texas in 198819.

In 1995, Union Pacific acquired C&NW for $1.1 billion. This subsequent merger causedchronic shipping delays and decrease in productivity in Union Pacifics services. Anothercompany UNP attempted to consolidate was theSanta Fe in 1994, which it subsequently lost toBurlington Northern. As a concession to UnionPacifics loss in the bid, Burlington NorthernSanta Fe gave Union Pacific significant trackingrights. Despite losing Santa Fe, Union Pacificmerged with Southern Pacific in 1996. Despitefierce opposition by major governmentdepartments and organizations, the merger wentthrough with the permission of the newly formedSurface Transportation Board, which replace theICC. As a result, Union Pacific was able to increase its track and by the end of the decade hadmore than 30,000 miles of track and an additional $10 billion in revenue20.

16 Ibid17 Ibid18 Ibid19 Ibid20 Ibid


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Just as the Chicago& North Western merger was inefficient, so too did the Union andSouthern Pacific merger run into similar problems. Some historians and rail experts contend thatit was indeed even worse than past aquicisitions by the company. The main issue at hand wasgridlock beginning to manifest itself in 1997. Rail customers suffered an estimated $1 billion dueto shipment delays. With the guidance of the STB, Union Pacific opened its freight business in

the Houston Hub all the way to Kansas City Southern. Union Pacific lost approximately $600million in 1998 due to both its trucking business and issues arising in its freight business21.

CSX Company History

CSX did not come into existence until Chesapeake and Ohio Railway and Seaboard CostLine merged in 1980. One of the first companies that preceded CSX was the Baltimore and OhioRailway. The company was chartered in 1827 and posed a considerable threat to business in the

canals and also for making transportation of passengers andfreight more cheaply. 22 Up until the Civil War, 1/3 of the

companys revenue consisted of coal, a ratio which wouldpersist for the majority of its lifespan into the 20 th century23.

After the war, B&O continued to grow, earning a goodreputation in part to the excellence of its management. Despitethe companys success, dividend policies reminiscent of Gould

from Union Pacific also plagued the company, becoming weaker by both its internal policy andthe debt it owed. Just before the turn of the century, B&O was placed into receivership andexperienced stable growth up till the end of the Second World War24.

Throughout the 1950s, revenue declined and the companys labor costs skyrocketed dueto the ever increasing demands of the unions for higher wages. Due to its crippling financial

position, the C&O bought a 61% share in the company and was approved by the ICC in 1961 totake over the company. The consolidation of these two railway companies produced an 11,000mile rail system25.

C&O also began in the early 19th century, being chartered in 1836. In the beginning of itsoperations it was known as the Louisa Railroad providing freight traffic for farmers andmerchants in Virginia. It changed its name to the Virginia Central Railroad and by 1867 wasofficially known from then on as the Chesapeake and Ohio Rail Company. Collis P. Huttingtonwas its president after the reorganization of the company in 1867 but was later replaced by J.P.Morgan in 1888 after years of financial trouble. Morgan was so successful with the company that

21 Ibid22"CSX Corporation -- Company History." Find Funding with Banks, Investors, and Other Funding Sources |

FundingUniverse. Web. 23 July 2011. .23 Ibid24 Ibid25Ibid


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it became extremely profitable by the end of the century, being a well run 1,445 mile long railline connecting several locals such as Virginia and Kentucky26.

The financial history of C&O in the first half of the 20 th century was dominated by fiscalresponsibility. After a series of acquisitions such as a 2,000 mile track from Pere MarquetteRailroad, the company grew soundly, avoiding most of the difficulties that plagued railroadspreviously mentioned. By 1954, C&O was aflourishing company, earning annual revenueupwards of $350 million and 5,000 miles of track.This success led to the purchase of B&O in 1963.Through the leadership of Hays T. Watkins in 1971 became diversifying the companys assets andwould later merge with Seaboard Rail in 198027.

CSX was consolidated after the merger ofChesapeake and Ohio Railway and Seaboard CoastLine in 1980. In response to difficulties that manifested from the Penn Central merger, both

Seaboard and C&O did not finish their complete merger until the end of the decade. To leadCSX in the current decade was Hays T. Watkins. While the merger was taking place, CSXdecided to diversify its assets. In 1983, the company made a deal with the Southern NewEngland Telephone Company to place fiber optic cables alongside the tracks owned by CSX.Another example of CSXs diversification is found in its decision to purchase Texas GasResources Company for $1 billion also in 1983. The company was one of the largest gas and oilreserves company in the country, adding $2.9 billion in revenue to the companys coffers28.

The ICC is known throughout the history of the railway companies to block mergers ofconsiderable size in accordance with antitrust. For CSX, however, most of its acquisitions wereapproved in the decade of the 80s; deregulation became the norm. One noted acquisition is the

$800 million purchase of Sea-Land Corporation whose main operations involved sea bargetransportation through the use of container ships. At this point, not only was CSX involved in theintermodal business nationally, but also international with the help of its previous purchase.Through the leadership of Watkins, CSX was able to expand rapidly into a variety of markets.Despite his ambition, the companys board of directors were beginning to feel disenchanted withthe low profits the company was gaining due to labor cost and more problems arising from thecompanys new set of purchases. In 1989, John W. Snow replaced Watkins29.

In stark contrast to Watkins leadership of the company in past years, Snow sold thecompanys oil and gas business and other recently purchased acquisitions. In addition to gettingrid of the companys recent acquisitions, Snow shook up management with the sole purpose ofmaking its rail industry become more profitable. Snow also bought back stock and deployed

26 Ibid27 Ibid28 Ibid29 Ibid


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more effective management after agreeing with labor unions to downsize the companysworkforce30.

Through Snows work with the company, CSX increased its revenues from $8.21 billionin 1990 to $10.4 billion in 1996. Snow became extremely meticulous in the activities of thecompany whch resulted in the acquisition of 42% of Conrail Inc. In a bitter dispute with NorfolkSouthern, the two companies decided to split Conrail after each attempted to outbid the other inthe Conrail purchase. Through its purchase, CSX gained approximately 4,500 miles of track31.

30 Ibid31 Ibid


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UNP COMPANY OVERVIEW

Union Pacific Corporation is one of the nations largest transportation companies. Thecompanys main subsidiary is Union Pacific Railroad, one of the leading railroad companies inthe railway industry. Union Pacific owns 32,000 miles of track and employs 43,500 workers.32

Union Pacifics capital spending since 2006 has been $11.3 billion, owning a total of8,200 locomotives. The railway company covers 23 states and link major West and Gulf Coastports, providing service through cities such as Chicago, St. Louis, Memphis, and New Orleans.The company aids in the transport of major commodities such as coal, agriculture, chemicals,

and minerals. Union Pacific Corporations customers range from steamshiplines, vehicle manufacturers, agriculture, utilities, and chemical companies.33

The current President of Union Pacific Corporation is James R.Young. He was named senior vice president in 1999. He came to thecompany as president in 2005 and was later elected chairman in 2007 buthas been involved in the company through a variety of managementpositions from 1978. 34

32Union Pacific Corporation. "UP: Company Overview." Redirecting to Up.com. Web. 01 Aug. 2011.

.

33 Ibid

34 Union Pacific Corporation. "UP: Executive Profiles." Redirecting to Up.com. Web. 01 Aug. 2011.

.


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INCOME STATEMENT

OPERATING REVENUE

35

Union Pacifics Operating Revenue was increasing steadily up until the start of therecession in 2008 and has been in the process of recovering from the economic downturn. Theincrease in freight revenue from 2009 to 2010 should be attributed to increased efficiency, risingfuel prices, and, most importantly, growing demand for the companys services. Since 2009,there has been a 20% increase in freight revenue.

According to Union Pacific, revenueis generated through the transportation of its

six commodity groups.36

Most agreementsbetween the company and its customers arebased on set contracts. As shown below,Union Pacific is involved in thetransportation of agriculture, industrialproducts, energy, chemicals, automotiveparts, and intermodal transport.

Segura Equities looks forconsistency in revenue growth as a large

component of our buy recommendation. Union Pacific has gone through a large inconsistency inits sales performance. Even though much of the fluctuations have the sour economy to blame,decreases and increases as big as 20% in the last couple of years may raise red flags forinvestors. Due to the lack of consistency in UNPs sales revenues, the company is encouraged todemonstrate to investors that it can stabilize its revenues in the near future in order to restoreconfidence in both the company and management. In addition, indicators of long term

35 Union Pacific. (2010, December 31st). Form 10-K: 51

36 Ibid 30


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sustainability usually relate as to how well a company can operate with both shocks in supplyand demand. Decreases in sales in the double digits create a certain amount of uncertainty in theability of management to navigate through tough economic times.

OPERATING EXPENSES

37

Union Pacifics expenses that have remained relatively stable through the last three yearshave been depreciation, equipment (mainly leasing costs), and compensation and benefits. Anincrease in depreciation costs from 2008 to 2009 suggests that the company has been makingconsiderable capital investments expecting long term growth in the future. UNPs expenses forequipment have decreased in the last couple of years. UNP attributes these decreases to itsrestructuring of locomotive leases and further decreases in leases for freight cars. 38 The decreasein the companys short term lease expenses in 2009 are described by th e company as a decreasein shipments of industrial products.39

In its presentation to investors, UnionPacific described how they controlled

their fuel costs by applying a fuelsurcharge. The company notes how fuelprices have increased in 2010. UnionPacific has had a 31% increase in theirfuel consumption but at the same timewas able to control costs throughinvestments such as more fuel efficientlocomotives. In addition, theaforementioned fuel surcharges alsoplayed an instrumental role in raisingrevenue to $2.3 billion in 2010, a 92%increase in freight revenue when

considering the effects from the companys fuel surcharges.40

37 Ibid 5138 Ibid 3139 Ibid 3040 Ibid 30


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NET INCOME

41

Union Pacifics 2010 net income has exceeded the previous years results even before thefinancial crisis took root. Union Pacific reported net income as high as 2,335 in 2008 and bestedthis record high after its downturn in 2009 to 2,780 in 2010. At first glance, these numberssuggest that Union Pacific did indeed have a speedy recovery with savvy management decisionsand that the overall health of the overall rail is recovering comparatively.

INCOME SHEET RELATED RATIOS

Net Profit Margin

UNP INDUSTRY S&P 50016.4 17.1 12.942

Union Pacifics Net Profit Margin is calculated when dividing net income from net sales.The ratio illustrates whether a company is generating a larger profit from every dollar made insales or services after all of its costs. In the case of UNP, the company is doing slightly worsethan the industry and fairing fairly well when compared to the economic average. In 2010, UNPreported a margin of 16.4, an increase of 22% from 2009s 13.4. These statistics show how UNPis effectively managing all of its sales and expenses in 2010.43

41 Ibid 5142http://moneycentral.msn.com/investor/invsub/results/compare.asp?symbol=UNP43http://www.advfn.com/p.php?pid=financials&btn=annual_reports&mode=&symbol=NYSE%3AUNP


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Gross Profit Margin

UNP INDUSTRY S&P 500

71.2 55.3 37.744

UNPs gross profit margin demonstrates that in comparison with both the industry andthe economy as a whole, it has been effectively selling goods and services for more than thedirect costs it takes to produce those goods or services. Over the past three years, UNP hasfluctuated primarily due to the financial crisis of 2008. At face value, UNP is currently managingits sales to their corresponding cost extremely well, beating the industrys and economysaverage by 29% and 89% respectively.45

44 MSN UNP45 ADVFN UNP


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BALANCE SHEET

ASSETS

46

According to UNP, the company has additional cash reserves in order to make sure thereis sufficient liquidity for when there are future financial downturns.47 This is a smart move byUNP because the transportation business relies heavily on the market price of commodities in itsevery day trading. Despite the companys implementation of a surcharge on fuel, UNP has toassure its investors that it is fully capable of confronting downturns or higher expenses and this

additional liquidity proves just that.

UNPs assets demonstrate considerable liquidity with more than one billion dollars incash or cash equivalents. UNPs largest set of assets are found in its Net Properties whichcreates some level of caution on the part of Segura Equities future buy/sell recommendation. Ifthere ever was an immediate funding need beyond the cash reserve, there would be aconsiderable amount of difficulty in liquidating rail road tracks and locomotives to help bridgesome kind of cash shortfall.

Even with the difficulty in liquidating rail long term assets, Union Pacifics assetallocation paints a good picture of a company ready to invest in capital intensive operations but

at the same time able to maintain a steady flow of liquidity in order to back up their operations incase of any financial burden that may come across the company in an unexpected fashion.

46 Union Pacific Form 10-K: 5247 Ibid 52


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LIABILITIES

48

When comparing UNPs assets to liabilities, the company records working capitalamounting to $480 million. This number demonstrates UNPs bandwidth to continue theiroperations since their assets are considerably greater than their liabilities. The amount of longterm debt that UNP is subject to clearly illustrates the workings of the railroad industry and thereality of high yearly interest payments as highlighted in the income statement. UNP reliesheavily on credit in tangent with their assets in order to continue financing their capital-intensiveoperations.

The amount of debt that UNP has, however, should be carefully analyzed over the next

couple of years. Later, we will analyze how UNPs liabilities are affecting its debt to equity ratioand cash flow expectations. UNPs debt should be closely considered since too much debt cancripple an institutions ability to pursue other initiatives and investments by consuming most of itsavailable cash on hand. Segura Equities will continue to monitor UNPs debt load and debtservicing costs going forward as it is a crucial indicator of the companys long term health.

48 Ibid 52


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STOCK HOLDERS EQUITY

49

One of the first aspects that shine when looking at Union Pacifics owners equity is itsretained earnings, which shows a 14% increase from 2009 to 2010. This statistics demonstrateshow UNP is trying to accumulate more earnings, showing they have a conservative stance withits funds so as to be prepared for any future financial disturbances in the industry or growth projects. In addition, UNPs treasury stock illustrates how the company has been purchasingmore of its own stock. Segura Equities belief is that the company believes that through thesepurchases, it will generate a larger return after future earnings will appreciate the stock it owns

and create a considerable gain. In addition, taking billions of dollars of stock out of the marketwill decrease supply therefore increasing the price of each individual share, benefitting existingshareholders and UNP.

PROFITABILITY RATIOS

Return on Equity


16.7 16.3 24.2

50

Union Pacifics ROE has fluctuated since the arrival of the financial crisis of 2008. In2009, there was a noticeable drop in ROE from 15.1 in 2008 to 11.2 in the following year: a 35%decrease. In 2010, however, the ratio improved by 49%. This jump means that each shareholder

49 Ibid 5250 MSN UNP


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is rightly benefitting from the increase in earnings. Compared with its industry, UNP is doingslightly better, demonstrating that it is efficiently utilizing its equity compared to competitors. Incontrast, the ROE of the economy as a whole is 48% better than the rail industrys average.51

ROE is made up of three key ratios; net profit margin, asset turnover, and financialleverage.. Union Pacifics asset turnover shows how the company was able to generate salesrevenue for each dollar of assets employed. UNPs asset turnover ratio is as follows:

Asset Turnover


.4 .4 .852

Union Pacifics asset turnover ratio demonstrates that the company is slowly recoveringfrom the financial crisis which resulted in an abysmal ratio of .3. However, the company was not

able to generate as many sales dollars per dollar of assets used as it did in 2008 with a ratio of .5before the effects of the crisis settled in. Though the numbers show that UNP has not fullyrecovered in utilizing its assets, they do show that they are recovering by either generating moresales or restructuring their assets employed. As mentioned earlier, the more likely of the twowould be the generation of more sales. UNP reported an increase in freight revenue, giving somecredit to rising fuel prices in 2010 that gave them an advantage with their fuel surcharge policy.In comparison with the industry, UNP is on par while the industry as a whole trails behind theaverage of the economy which is slated at .8 after the crisis.

The last ratio that makes up return on equity is financial leverage. Financial leveragemeasures how many dollars of assets are employed for every dollar of stock holders equity.

Union Pacifics financial ratios for the last three years are as follows:

Financial Leverage


2.4 2.5 3.653

UNPs financial leverage ratios from 2008 demonstrate how the company has beenprogressively decreasing its reliance on debt in order to finance its operations, which was at a 2.6before the crisis materialized. The decreasing ratios can mean that the company is losing itscredit worthiness or is interested in leveling off some of the debt it currently holds. As we will

examine in the debt to equity ratio, UNP has a considerable amount of debt which is actuallyfairly common in the railroad industry since debt is one of the major tools in financing most ofthe operational activities. In this case, debt is decreasing meaning the company might want to

51 ADFN UNP52 MSN UNP53 Ibid.


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head in a direction where they minimize their reliance on debt and strive for efficiency in theirdeployment of assets.

Overall, the companys Return on Equity shows how UNP is striving for more efficiencyin cleverly deploying its assets and assembling alternative revenue mechanisms. Besidesefficiency and lessening its reliance on debt, UNP is also managing its sales in relation to itsexpenses and is improving its profits.

Union Pacifics debt to equity ratio demonstrates the companys balance between debtand equity. Debt is looked upon as being riskier than equity because the company is bound bycontract to pay back its creditors, pressuring the company in ensuring that it has sufficient assetsto guarantee its obligations. UNPs debt to equity ratios, for the last three years, are as follows:

Debt to Equity


.49 .63 1.0454

Union Pacifics debt is the main contributing factor to how the company finances its

activities. Compared with the industry, UNP is in good shape, scoring a ratio 29% lower than theindustry average. UNP has had debt as high as .58 during 2008 and 2009. The drop in the ratioillustrates how UNP is taking measures that reflect how it does not want to be straddled in debt.UNPs ratio of .49 may be considered too high for some, but when compared to both the industryand the economy, UNP scores high marks.55

Current Ratio


1.2 1.1 1.256

The current ratio describes how well a company can pay off its short term debt withcurrent assets. A ratio below 1 demonstrates that the company will have considerable difficultyin paying back its short term obligations. In the case Union Pacific, its current ratio has beenabove 1 for the last two years. However, they were on the border of not being able to complywith their short term obligations in 2008. Despite the danger they faced in 2008, Union Pacifichas improved on their ability to pay their short term obligations.57

In comparison with the industry, UNP is faring slightly better than its competitors and ison par with the economy as a whole when analyzing their ability to pay off their currentliabilities. Most of the financial data provided thus far by Union Pacific has shown that the

54 MSN UNP55 ADVFN UNP56 MSN UNP57 ADVFN UNP


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company is improving its financial position when taking into account the effects of the financialcrisis and increasing prices.

Receivables Turnover


12.9 11.3 14.558

Receivables turnover indicates how fast the company is able to convert credit into cash.A higher ratio indicates that it takes less time for this process to occur. For Union Pacific, thecompany is struggling in comparison with the industry. In contrast, UNP is faring better than theeconomy as a whole by 12%. These ratios clearly demonstrate that Union Pacific is attempting toprop up its sales, extending more time for their customers to actually pay what is due.

58 MSN UNP


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STATEMENT OF CASH FLOWS

59

59 Union Pacific Form 10-K: 53


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Union Pacifics operating activities shows a positive increase in cash flow. In addition,the companys cash provided by operating activities is larger than its net income. This illustratesthat the company is generating enough cash for both future investments and paying its debt whendue.

In Union Pacifics investing section, the company has increased capital expenditures by5%, demonstrating that the company is investing in PPE for the future. In the companysfinancing section, Union Pacific has been increasing its debts to be repaid by 62%, signaling thatthe company is willing and, more importantly, able to repay its obligations. In addition, thecompany has repurchased common shares showing how the company is interested in expandingits treasury stock and increasing the price of their shares outstanding, providing a larger returnfor their shareholders.


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CSX COMPANY OVERVIEW

CSX Corporation is considered as one of the leading transportation companies in theindustry. The company owns about 21,000 miles of track in 23 states and also D.C and severalprovinces in Canada. More than 2/3 of the nations inhabitants live within the service territory ofCSX, highlighting its overall influence in the country. Apart from rail, the company alsocontributes to major markets within the nations major waterways such as the Mississippi Riverand the St. Lawrence Waterway. With the help of rival rail companies,CSX has access to pacific ports as well.60

The current President and CEO of CSX Corporation is Michael J.Ward. Ward has worked for the company for 33 years, serving aschairman, president, and CEO since 2003. Wards experience in the railindustry consists of his experience with the companys sales and marketingand operations and financing divisions.61

60CSX Corporation. "Company Overview - CSX." Welcome to CSX.com - CSX. Web. 01 Aug. 2011.

.

61 CSX Corporation. "Management Team - CSX." Welcome to CSX.com - CSX. Web. 01 Aug. 2011.

.


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CSX FINANCIAL INFORMATION

Revenues and Expenses

62

CSX attributes the majority of their growth in the last year after the financial crisis to an

increase in volume of sales. The companys revenue increased by 18% and can be attributed toan increase in the volume in merchandise transported; consisting of agriculture, industrial, andhousing construction. These are all signals of increased demand and an indicator that the overalleconomy is improving. CSX also attributes their increase in revenue to rising fuel prices. LikeUnion Pacific, CSX also employs fuel surcharge mechanisms when performing their services.63

Even though revenue increased over the last year, so did CSXs expenses. CSXsexpenses have increased since 2009 by 12%, almost matching their revenue increase of 18%.The company attributes this increase primarily to an increase in labor costs and fuel prices.CSXs expenses consist of labor, materials and supplies, increasing volume of sales, safety,operating expenses, fuel, depreciation, and equipment.64

When considering both revenue and expenses, CSX has improved and is recovering fromthe financial meltdown in 2008. CSXs operating income has increased by 35% and exceeds theoperating income before the recession. These statistics demonstrate that CSX is improving in

62 CSX. (2010, December 31st). Form 10-K: 61

63Ibid 28

64Ibid 37


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their efficiency and that management is adapting to the market after experiencing a brief, butsignificant downturn.

Net Income

65

CSXs net earnings in 2010 exceeded its net earning recorded in 2009 and 2008,demonstrating that the company has indeed increased return after a yearlong lag in sales. A 37%increase from 2009 to 2010 illustrates the companys recovery and expansion in the market.

65Ibid 61


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CSXs financial numbers thus show promise for future operations but they must controltheir labor cost in order to not only increase revenue but, more importantly, increase netearnings. If CSX is not able to manage their costs with sufficient care, labor costs may continueto increase and further weaken the companys bottom line and future prospects.

Net Profit Margin

CSX INDUSTRY S&P 500

15.4 17.1 12.966

CSXs net profit margin shows how the company is effectively managing its sales andexpenses. In comparison with the industry, CSX is lagging behind the industry by 11%,illustrating how the company must better manage its sales and expenses. In comparison with theeconomy, the company is doing 19% better. In 2010 there was a 16% increase from 2009 and a21% increase from 2008. Despite the economic downturn in 2008, the company is increasing theamount of profit it makes from its sales. This is a strong indicator of the companys growth andfuture outlook in the coming years.

The companys net profit margin should assuage any investors worries that CSX will notbe able to make a healthy profit after the recession

Gross Profit Margin


65.3 55.3 37.767

CSXs gross profit margin demonstrates how well the company is doing when selling itsservices for more than the cost it takes to carry them out. In comparison with the industry, CSX

is ahead of the curve by 18%. In comparison with the overall economy, CSX is doing better by73%. Despite its position in the current year, CSXs gross profit margin has fluctuated over thepast couple of years. Despite the growth in the ratio from 2008 to 2009 from 59.0 to 73.0, theeconomic recession most likely caused a downturn in the ratio between 2009 and 2010 and into

66http://moneycentral.msn.com/investor/invsub/results/compare.asp?symbol=CSX

67 Ibid


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the present year. These numbers indicate how CSX has been faltering in its approach of sellingits services for more than the cost its takes to make them available to its customers.

Investors should be wary of CSXs fluctuating gross profit margin. Future emphasis onconsistency in selling its services for more than their corresponding cost would benefit investorsin making them confident in the companys future. Despite the inconsistencies, the company iscurrently doing better than the industry promising efficiency to remain in CSXs currentactivities.

BALANCE SHEET

ASSETS

68

The assets of CSX are typical of the assets found in any related company involved in thetransportation industry, more specifically railroading, which include liquidity on hand and amajority of assets based on its property plant and equipment. CSXs largest expenditure consistsof replacing track. The second largest capital expenditure the company engages in is in itslocomotives and freight cars.

CSX appears to be operating as a railroad company should be with a majority of assetsbased in properties and enough liquidity to ensure there is a safeguard against any collateraldamages the company may incur either through accidents, lawsuits, or any additionalregulations.

68 CSX Form 10-K: 62


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LIABILITIES

69

CSXs liabilities demonstrate any short and long terms obligations the company mustfulfill. The majority of the companys liabilities can be found in its long term debt. One of themain preoccupations the company has is the fact that the companys short term liabilities almostmatch all of the companys current assets. The main issue lies in the possibility that if the growthin the companys short term liabilities outpace its current assets, then it will lack the means tofulfill all of its short term obligations. This inability to fulfill its current year obligations mightcause CSX to lose any valuable credit rating it currently holds or by forcing the company to

liquidate long term assets.

69 Ibid 62


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STOCK HOLDERS EQUITY

70

CSXs owner equity has not experienced any significant changes in the last couple ofyears. Their retained earnings is on par with last years and their common stock has virtually

stayed consistent. The lack by management at CSX in issuing more stock could be a problem forthe company considering the amount they already borrow.

PROFITIBILITY RATIOS

Return on Equity


19.9 16.3 24.271

CSXs return on equity ratio demonstrates how the company is faring in comparison with

the industry. Currently the company is ahead of the industrial average by 22% illustrating thatCSX has been managing their equity efficiently. CSX made a positively changed from last yearsROE, improving from a ratio of 13, a 53% gain.722009s ratio was a drop from a ratio of 17 in

70Ibid 6271 MSN CSX72

http://www.advfn.com/p.php?pid=financials&btn=s_ok&mode=annual_reports&symbol=NYSE%3ACSX&s_ok=OK&start_d

ate=13


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2008, however, despite the financial crisis of 2008, CSX is outperforming the average industrialROE.

When comparing CSXs ROE with the economy, the company still has some work to doin improving how it utilizes its equity. With the current trend, CSX should meet expectations andinch closer to the S&P 500 average.

Asset Turnover

CSX INDUSTRY S&P500

.4 .4 .873

The asset turnover ratio for CSX has been disrupted by the financial crisis in 2009 with adrop from .4 to .3, however, the ratio returned to its previous position of .4 in 2010. This ratiodescribes how CSX was effective in generating sales dollars per dollar of assets used. Returningto its previous position and demonstrating that the management was able to more effectively useits resources, increasing efficiency and accountability in its deployment of assets.74

In comparison with the industry average, CSX is on par signaling that in relation to therest of the industry, CSX is stable with its asset turnover ratio. When comparing CSX with theoverall economy, the company is lagging by 100%. The disparity between the ratios shows howthe transport industry generates less sales dollar per dollar of assets employed, illustrating thetypes of returns that are expected when working in heavy industry.

Financial Leverage


3.2 2.5 3.675

The financial leverage of a company demonstrates how much it relies on its debt in orderto finance its assets. In the case of CSX, the companys leverage is 28% higher than theindustrial average, demonstrating how much more the company relies on debt in order to financetheir activities. When comparing CSX with the economy, the railroad industry relies less heavilythan the economy taken as a whole.

73 MSN CSX74 ADVFN CSX75 MSN CSX


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Though some may consider CSXs leverage to be too high, it can be an indicator ofCSXs hope to grow. Borrowing is both important and expensive. Results from future years willfurther highlight whether CSX is benefiting from these investments in debt or whether thecompany is indeed in financial troubles.

Debt to Equity


.97 .63 1.0476

Debt to equity illustrates how much debt there is to equity. CSX relies more heavily ondebt than the industry of transportation does as a whole. When compared to the S&P 500, theeconomy relies more heavily on its debt financing than those in the railroad industry. Thefollowing ratios do not paint a promising picture of the companys financial future. Whenreviewing the CSXs financial leverage for the past three years, the company has beenconsistently flirting with a high debt to equity ratio.

Current Ratio

CSX INDUSTRY S&P 5001.2 1.1 1.277

The current ratio demonstrates how well a company is able to pay off its short term debt.As shown in the table above, CSX is in a better financial position than its competitors in relationto its ability to finance its current debt. Because of CSXs heavy reliance on long term debt,unless the company reorganizes its finances, its current ratio should be expected to decrease.

Receivables Turnover


11.0 11.3 14.378

76 Ibid77 Ibid


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Receivables turnover indicates how fast a company is able to convert extended credit tocash. In the case of CSX, the company had a decrease in their receivables turnover in 2009,however they were able to make a rebound in 2010 by means of a 24% increase. This increaseindicates that the company has become more efficient in managing its credit when converting itto cash. In comparison with the industry, CSXs competitors are slightly better than CSX in

converting credit into cash. In comparison with the economy, both CSX and the industry lagbehind by 30% and 27% respectively.79

STATEMENT OF CASH FLOWS

78 Ibid79

ADVFN CSX


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80

CSXs operating section shows a positive increase in cash flow. In addition, thecompanys cash provided by operating activities is larger than its net income. This illustrateshow the company is generating enough cash for both future investments and current financing.

The companys investing section shows an increase in capital expenditures by 28%,signaling to investors it intends to improve its operations for future business. CSXs financingsection shows a decrease in debt to be repaid by 186%, signaling to investors it will continue torely on debt in order to make further investments. The company paid dividends by an increased8% from last year and has repurchased stock in order increase existing shareholder return.

80 CSX Form 10-K: 63


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SEGURA EQUITIES SOLUTIONS RECOMMENDATION


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Taking all of the information presented by Segura Equity Solutions above, werecommend that our clients invest in Union Pacific Corporation for the following reasons:

- The company benefits from a well developed logistics network based on 32,000 miles of

track across 23 states.

- The companys revenues for the year ended 2010 were balanced and cash flows from

operating activities showed positive growth, strongly suggesting the soundness of UPNs

current activities.

- UNP is involved in a variety of markets within its intermodal business, decreasing the

likelihood that the company will suffer devastating losses due to how diversified its

operations are.

- In comparison to CSX Corp., Union Pacifics Earnings per Share is $5.58, 37% greater

than CSXs $4.06, illustrating how the value of Union Pacifics shares are is currently

greater than those issued by CSX.

- Union Pacific reported a $4,105 billion from its operating activities. In contrast, CSX

reported $3,246 billion from its operating activities. This comparison highlights how

Union Pacific has more cash available to pay greater sums of dividends for its investors

and its other investing and financing activities. When coupling this statistics with both

companiesdebt to equity ratio, Union Pacific demonstrates that it does not require the

amount of debt CSX maintains in order to be profitable in generating cash.

We strongly encourage the investor in participating in the growth of Union Pacific

Corporation. The railway industry is growing every year, providing an attractive alternativeto other forms of intermodal transport. In addition, the company has faired the economiccrisis of 2008 well, further strengthening its reputation as a prudent, but proactivecorporation, confident in the future of its business.

Works Cited


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"America on the Move | Railroads Role, 1950-2000."National Museum of American History.

Web. 23 July 2011. .

"America on the Move | Railroads to Mid-Century / Salisbury, North Carolina, 1927."National

Museum of American History. Web. 23 July 2011.

.

"CSX Corporation -- Company History." Find Funding with Banks, Investors, and Other

Funding Sources | FundingUniverse. Web. 23 July 2011.

.

CSX Corporation. "Company Overview - CSX." Welcome to CSX.com - CSX. Web. 01 Aug.

2011. .

CSX Corporation. "Management Team - CSX." Welcome to CSX.com - CSX. Web. 01 Aug.

2011. .

CSX. (2010, December 31st). Form 10-Q Retrieved July 25th, 2011 from http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9ODI0NDZ8Q2hpbGRJRD0tMXxUeXBlPT

M=&t=1

"Early American Railroads [ushistory.org]." Ushistory.org. Web. 23 July 2011.

.

"History of Railroads and Maps."Memory.loc.gov. Library of Congress. Web. 23 July 2011.

.


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"Railroad History, An Overview Of The Past." The American Railroads. Americanrails.com.

Web. 23 July 2011. .

http://moneycentral.msn.com/investor/invsub/results/compare.asp?symbol=UNP

http://moneycentral.msn.com/investor/invsub/results/compare.asp?symbol=CSX

"Union Pacific Corporation -- Company History." Find Funding with Banks, Investors, and

Other Funding Sources | FundingUniverse. Web. 23 July 2011.

.

Union Pacific Corporation. "UP: Company Overview."Redirecting to Up.com. Web. 01 Aug.

2011. .

Union Pacific Corporation. "UP: Executive Profiles."Redirecting to Up.com. Web. 01 Aug.

2011. .

Union Pacific. (2010, December 31st). Form 10-Q Retrieved July 25th, 2011 from

http://www.up.com/investors/attachments/secfiling/2011/upc10k_020411.pdf

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