union pacific corporation (unp) ilham bachtiar, kyle castner, michael haberkorn, yichen sun...
TRANSCRIPT
Union Pacific Corporation (UNP)
Ilham Bachtiar, Kyle Castner, Michael Haberkorn, Yichen Sun
Presented March 31, 2015
Today’s Agenda Introduction Macroeconomic
Overview Industry Analysis UNP Business
Overview Stock Market
Performance Financial Analysis Valuation Recommendation
Quarter to Quarter GDP Growth
Macroeconomic Overview• Steady GDP performance in the past year with
growth predicting to increase in 2015
Macroeconomic Overview• The rail road industry is based on trade
Source: IBIS World
Macroeconomic Overview
• Over 95% of rail road revenue is generated from bulk freight and intermodal services.
Source: IBIS World
Source: IBIS World
Macroeconomic Overview
• Mexico total expected freight traffic expected to increase at 4.1% CAGR thru 2020
Percent Change in Value of U.S.-Mexico Freight Flows (Feb 2013-Feb2014)Source: U.S. Department of Transportation
Mexico & OECD GDP Growth
Rail Transportation Industry Outlook
• Growingo Higher Demand
• Macro recovery• Organic growth
o Strategic partnership with transportation providers
o Higher profit margins due to upgrades
o Continuing capital investments
Source: IBIS World
Industry Porter’s Five Forces
Threat of New Entrants: Low
• Very capital intensive
Threat of Substitutes:
High• Trucks: low oil
price• Barges,
pipelines
Rivalry Among Existing Firms:
Medium• Highly
concentrated
Buyers Power : Low
- Lack of alternatives- Favorable margin
Suppliers Power: High
• A few suppliers of locomotives & rail
Chairman, CEO and CFO• Chairman: Jack Koraleski
o Worked within UNP since 1972 (Marketing and Finance)
• CEO: Lance Fritzo Worked with UNP since 2000 (Operations and
Management)
• CFO: Robert Knighto Worked within UNP since 2000 (Finance, focus
in automotive group)
Compensation Charts• Chairman
• CEO
• CFO
Other Management Numbers
Management QuantifiedName % Holdings TenureCNI 0.1590% 18.7NSC 0.2625% 16.5CSX 0.4437% 15.5CP 0.1363% 2.2UNP 0.3289% 17.6
Average 0.2661% 14.1
Company Overview• Vision :
o Building America
• Values :o Focus on Performanceo Ensure High Ethical Standardso Work as a Team
SWOT AnalysisStrengths Weaknesses
- Diversified Markets- Strong ROIC- Invest in Technology (PTC)
- Transport Hazardous Materials
- Labor Upheavals- Commodity volatility- Underfunded Pension
Opportunities Threats- Increasing U.S. Population
Base- Growing GDP- Increasing Environmental
Consciousness
- Governmental Regulations (STB)
- Weather Related - RR security and safety- Low oil prices: truck, coal
Source: IBIS World
Business Division
• Freight revenues increased during 2014 compared to 2013 driven by 7% volume growth and core pricing gains of 2.5%
• In terms of Q (units) sold, Freight Sales increased by 3.2%
Source: UNP 10-K
Current Stock Information
Source: Yahoo Finance
Metric Value
Current Stock Price
$110.10
Trailing P/E 19.15
Forward P/E 14.8
Dividend Yield 2.00%
Market Cap97.21
($ billions)Est. PEG Ratio 1.20
5 Year Dividend Growth
30.00%
FY 2011 FY 2012 FY 2013 FY 2014
Tax Burden NI/EBIT 62.54% 62.41% 62.26% 62.09%Interest Burden % EBT/OI 91.96% 93.67% 94.65% 95.32%Operating Profit Margin % OI/REV 29.27% 32.23% 33.90% 36.49%Asset Turnover Rev/Avg Asset 44.35% 45.37% 45.34% 46.83%Leverage Avg Asset/Avg Eqty 2.43 2.40 2.36 2.42ROE % 18.12% 20.51% 21.35% 24.43%Payout Ratio 28.49% 29.93% 31.24% 33.09%
DuPont Analysis
Current Holding: Apr-25-13 (2 for 1 Jun-9-14) 200 @ $74.10Current Gain: $7198,
49%
Stock Performance
Financial Analysis
Source: Bloomberg
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014EBIT/Tangible Assets 13.37% 14.74% 16.43% 17.43% 19.33%EBIT/Enterprise Value 19.22% 21.79% 24.25% 25.35% 28.16%
Joe Greenblatt Ratios
ROA ∆ROA CFO ACCRUAL ∆Margin ∆Turn ∆Lever ∆Liquid
SEO (Secondary
Equity Offering)
10.11% 1.05% 7,385 2,205 2,025 1.49% 2.97% 18.75% No 8
Scores
Piotroski
Profitability Operating Eficiency Leverage/Liquidity
F_SCORE
Cost of Capital
Market Value of Equity 101,383 87.2%
Share Price 112.51$ Fully Diluted Shares Outstanding 901.1 Debt 14,905 12.8%
Cost of Debt 5.3%
Cost of Equity 9.0%CAPM Cost of Equity 8.99% 100.00%UNP Realized Return 27.23% 0.00%
Tax rate 37.91%WACC 8.26%Business Risk Premium 2.00%Discount Rate 10.26%
Terminal Growth 3.00%
Weighted Average Cost of Capital
Risk-Free Rate 2.00%Market Risk Premium 6.00%5-Year Beta 1.17
CAPM Cost of Equity 8.99%
Year Return
1 22.10%2 29.99%3 30.08%4 26.42%5 27.55%
Average Annual Return 27.23%
CAPM
Annual Realized Returns
Revenue Projection$ in Millions
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019ERevenueAgricultural
Revenue Carloads (thousands) 865 918 934 900 874 973 909 922 911 920 950% Growth - 6.1% 1.7% -3.6% -2.9% 11.3% -6.6% 1.4% -1.1% 1.0% 3.3%Average Price per Car 3,080 3,286 3,561 3,644 3,746 3,881 3,994 4,110 4,230 4,353 4,480% Growth - 6.7% 8.4% 2.3% 2.8% 3.6% 2.9% 2.9% 2.9% 2.9% 2.9%Total Agricultural Revenues 2,664 3,017 3,326 3,280 3,274 3,776 3,629 3,788 3,854 4,005 4,256% of Freight Revenues 19.9% 18.8% 18.0% 16.7% 15.8% 16.7% 14.9% 14.2% 13.6% 13.2% 13.1%
ProjectedHistorical
CoalRevenue Carloads (thousands) 2,021 2,056 2,164 1,871 1,703 1,768 1,750 1,759 1,764 1,775 1,784 % Growth - 1.7% 5.3% -13.5% -9.0% 3.8% -1.0% 0.5% 0.3% 0.6% 0.5%Average Price per Car 1,543 1,697 1,888 2,092 2,336 2,334 2,404 2,476 2,550 2,627 2,706 % Growth - 10.0% 11.3% 10.8% 11.7% -0.1% 3.0% 3.0% 3.0% 3.0% 3.0%Total Agricultural Revenues (millions)3,118 3,489 4,086 3,914 3,978 4,127 4,208 4,356 4,500 4,663 4,827 % of Freight Revenues 23.3% 21.7% 22.1% 19.9% 19.2% 18.3% 17.3% 16.3% 15.9% 15.4% 14.9%
Total Freight Revenues 13,372 16,071 18,508 19,685 20,685 22,560 24,282 26,647 28,366 30,256 32,445 % Growth - 20.19% 15.17% 6.36% 5.08% 9.07% 7.63% 9.74% 6.45% 6.66% 7.23%
DCFUnion Pacific CorporationDCF 1 2 3 4 5
2015E 2016E 2017E 2018E 2019E Terminal
EBIT 9,933 11,152 12,065 13,221 14,553 Less: Taxes (3,547) (3,988) (4,318) (4,739) (5,223) Plus: Depreciation 2,206 2,330 2,486 2,658 2,856 Less: Capital Expenditures (4,300) (4,542) (4,846) (5,180) (5,566)
Changes in Net Working CapitalLess: Increses in A/R (130) (170) (128) (141) (162) Less: Increases in Materials and Supplies (84) (78) (58) (64) (74) Plus: Increases in A/P 507 373 280 308 355
Free Cash Flow 4,586 5,077 5,481 6,063 6,739 95,601 Present Value 4,159 4,176 4,089 4,102 4,135 58,664
Discount Rate 10.26% 10.26% 10.26% 10.26% 10.26% 10.26%Terminal Growth Rate 3.00%
Enterprise Value 79,327 Less: Debt 12,003 Market Capitalization 67,324
Share Price 74.71$
Comp Set (Product Segmentation)
UNPIntermodal 20.00%Agricultural Products 17.00%Automotive 9.00%Chemicals 16.00%Coal 18.00%Industrial Products 20.00%
NSCCoal 21.00%General Merchandise 57.00%Intermodal 22.00%Assigned: 40.00%CSXCoal 22.00%Merchandise 60.00%Intermodal 14.00%Other 4.00%Assigned: 35.00%
CNRU.S. 17.00%Transborder 33.00%Canadian 19.00%Overseas Traffic 31.00%Assigned: 10.00%CP 6464Agricultural Products 32.05%Coal 9.61%Timber 3.19%Chemicals 9.85%Crude 7.49%Metals 11.01%Automotive 5.52%Intermodal 21.27%Assigned: 15.00%
Comp Ratios and InfoUNP Comparables AnalysisTicker Name Mkt Cap (USD) Rev - 1 Yr Gr:Y EPS - 1 Yr Gr:Y P/ E ROE Ev/ EBITDA P/ B P/ S ROA LF ROIC LFUNP US Equity UNION PACIFIC CORP 102,599.09$ 9.22% 21.86% 20.43 24.43% 9.59 4.85 4.35 10.11% 11.65%CSX US Equity CSX CORP 34,303.26$ 5.35% 5.46% 17.62 17.81% 8.45 3.08 2.74 5.94% 8.06%NSC US Equity NORFOLK SOUTHERN CORP 33,778.43$ 3.37% 5.57% 17.20 16.87% 8.84 2.73 2.92 6.09% 7.60%CNI CN Equity CANADIAN NATL RAILWAY CO 55,634.94$ 14.74% 24.52% 23.33 23.97% 12.75 5.28 5.93 10.22% 11.48%CP CN Equity CANADIAN PACIFIC RAILWAY LTD31,279.68$ 7.94% 70.80% 28.49 23.23% 13.66 7.15 6.29 8.76% 10.51%
Raw Average 51,519.08$ 8.12% 25.64% 21.41 21.26% 10.66 4.62 4.45 8.23% 9.86%Difference 51,080.01$ 1.10% -3.78% -0.99 3.16% -1.07 0.24 -0.10 1.89% 1.79%
P/ E ROE Ev/ EBITDA P/ B P/ S ROA LF ROIC LFWeighted Averages: 19.65 18.87% 9.82 3.77 3.66 6.85% 8.59%
Comparable Valuation
Multiple Price WeightP/E 112.99$ 40.00%Ev/EBITDA 107.27$ 40.00%P/B 88.05$ 10.00%P/S 93.59$ 10.00%Final Blend: 106.27$
As of: 3/17/2015
Recommendation
• Current price below 20 and 200 Day MA.
• 20 Day MA above 200 Day MA
Momentum
• Steady growth projections
Growth
DCF Valuatio
n $74.71
Comparable Analysis Valuation $106.27
Current Stock Price
$110.10
SELL100
SharesLimit $108
• Currently owned:200
shares• Current Gain
$7,198, 49%Current Holding