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![Page 1: Union Pacific Corporation (UNP) Ilham Bachtiar, Kyle Castner, Michael Haberkorn, Yichen Sun Presented March 31, 2015.](https://reader036.fdocuments.net/reader036/viewer/2022062518/56649ea45503460f94ba83bf/html5/thumbnails/1.jpg)
Union Pacific Corporation (UNP)
Ilham Bachtiar, Kyle Castner, Michael Haberkorn, Yichen Sun
Presented March 31, 2015
![Page 2: Union Pacific Corporation (UNP) Ilham Bachtiar, Kyle Castner, Michael Haberkorn, Yichen Sun Presented March 31, 2015.](https://reader036.fdocuments.net/reader036/viewer/2022062518/56649ea45503460f94ba83bf/html5/thumbnails/2.jpg)
Today’s Agenda Introduction Macroeconomic
Overview Industry Analysis UNP Business
Overview Stock Market
Performance Financial Analysis Valuation Recommendation
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Quarter to Quarter GDP Growth
Macroeconomic Overview• Steady GDP performance in the past year with
growth predicting to increase in 2015
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Macroeconomic Overview• The rail road industry is based on trade
Source: IBIS World
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Macroeconomic Overview
• Over 95% of rail road revenue is generated from bulk freight and intermodal services.
Source: IBIS World
Source: IBIS World
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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
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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
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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
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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)
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Compensation Charts• Chairman
• CEO
• CFO
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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
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Company Overview• Vision :
o Building America
• Values :o Focus on Performanceo Ensure High Ethical Standardso Work as a Team
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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
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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
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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: $7198,
49%
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Stock Performance
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Financial Analysis
Source: Bloomberg
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014EBIT/Tangible Assets 13.37% 14.74% 16.43% 17.43% 19.33%EBIT/Enterprise Value 19.22% 21.79% 24.25% 25.35% 28.16%
Joe Greenblatt Ratios
ROA ∆ROA CFO ACCRUAL ∆Margin ∆Turn ∆Lever ∆Liquid
SEO (Secondary
Equity Offering)
10.11% 1.05% 7,385 2,205 2,025 1.49% 2.97% 18.75% No 8
Scores
Piotroski
Profitability Operating Eficiency Leverage/Liquidity
F_SCORE
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Cost of Capital
Market Value of Equity 101,383 87.2%
Share Price 112.51$ 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
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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%
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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$
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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%
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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%
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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
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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