Union Pacific Corp. (UNP, Financial), the $44.9 billion railroad company, reported its second-quarter 2017 results on Jully 20. The Nebraska-based, 155-year-old company delivered 8.2% year-over-year revenue growth to $10.4 billion in the first half 2017 and a 14% profit growth to $2.24 billion (21.6% margin versus 20.4% in the year prior).Â
Chairman, President and CEO Lance Fritz commented on the company's performance:
“I am pleased with our results through the first six months, and look forward to continuing our momentum through the remainder of the year.
Guided by our strategic value tracks, our entire team is focused on providing an excellent customer experience while safely and efficiently delivering on our innovative productivity initiatives."
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Valuations
Union Pacific is currently overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 20 times versus the industry median of 17.6 times, a price-book (P/B) ratio of 4.3 times versus 1.2 times and a price-sales (P/S) ratio of 4.3 times versus 1.14 times.
Union Pacific also had a trailing dividend yield of 2.26% with a 43% payout ratio.
Average 2017 revenue and earnings per share estimates indicated forward multiples of four times and 18.2 times.
Total returns
Union Pacific has underperformed the broader S&P 500 index so far this year with 2.3% total gains versus the index’s 11.67%.
Union Pacific
According to filings, Union Pacific was incorporated in Utah in 1969. Union Pacific Railroad Co.is the principal operating company of Union Pacific Corp.
One of America's most recognized companies, Union Pacific Railroad Co. links 23 states in the western two-thirds of the country by rail, providing a critical link in the global supply chain.
The company’s diversified business mix includes agricultural products, automotive, chemicals, coal, industrial products and intermodal.
In addition, Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to Eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways.
Although revenue is analyzed by commodity, Union Pacific, along with its subsidiaries and rail affiliates, is its one reportable business segment.
Freight revenues, or revenue from transporting freight or other materials from the company’s six commodity groups, represented 93% of its fiscal year 2016 total revenue.
Agricultural products
Revenue in the agricultural products segment rose 7% in the first half 2017 from $1.85 billion, or 19% of freight revenue, in the prior year. The segment experienced a -2% average drop in fiscal years 2015 and 2016.
Automotive
Revenue for the automotive segment grew 1.9% year over year in the first half to $1.02 billion, or 10% of freight revenue. The segment experienced -2.4% decline on average in fiscal years 2015 and 2016.
Chemicals
Revenue in the chemicals segment rose 2.4% in the period to $1.78 billion, or 18% of freight revenue. The segment experienced an average -2.6% reduction in fiscal years 2015 and 2016.
Coal
Revenue in the coal segment grew 25% to $1.27 billion, or 13% of freight revenue. The segment experienced a -23% average drop in fiscal years 2015 and 2016.
Industrial products
Revenue in the industrial products grew 16% year over year to $1.94 billion, or 20% of freight revenue. The segment experienced an average decline of -12.8% in fiscal years 2015 and 2016.
Intermodal
Revenue in the intermodal segment rose 3.3% year over year to $1.85 billion, or 19% of freight sales. The segment experienced an average decline of -9% in fiscal years 2015 and 2016.
Operating ratio
The operating ratio is Union Pacific’s operating expenses reflected as a percentage of operating revenue.
According to Investopedia, an operating ratio of 80 or lower has generally been seen as "good," but having a target a bit lower, down in to the mid-70s, is even better.
In the first half, Union Pacific registered 63.4% compared to 65.1% in the prior-year period.
Sales and profits
Over the past three years, Union Pacific registered average revenue decline of -3.2%, a profit drop of -1.19% and a profit margin 21.6%.
Cash, debt and book value
As of June, Union Pacific had $1.29 billion in cash and cash equivalents and $15.76 billion in debt with a debt-equity ratio of 0.8 times versus 0.74 times in the same period last year. Overall debt rose by $574 million year over year and equity has dropped by $807 million.
No blue sky elements (goodwill and intangible assets) were observed in Union Pacific’s assets while book value has been reduced by -3.95% year over year to $19.6 billion.
Cash flow
In the first half 2017, cash flow from operations declined -1.9% year over year to $3.46 billion. Despite the higher profits, the company had higher cash outflows in its receivables, other current assets and accounts payable.
Capital expenditures were $1.59 billion, leaving Union Pacific with $1.87 billion compared to $1.94 billion in the same period last year. Nonetheless, the company allocated $37 million to debt repayments (net any issuances); while having allocated 1.4 times its free cash flow ($2.59 billion) to share repurchases and dividend payouts.
In the first half, Union Pacific repurchased 15.3 million shares at an average price of $107.85 versus $104.85 at the time of writing. In fiscal years 2015 and 2016, the company repurchased its shares at an average price of $98.14 and $88.57, respectively.
The cash flow summary
Over the past three years, Union Pacific allocated $12.5 billion to capital expenditures, generated accumulatively $9.75 billion in free cash flow, raised $5.36 billion in debt (net repayments) and provided $15.65 billion in shareholder payouts (buybacks and dividends) at an average payout ratio of 166%.
Conclusion
Union Pacific definitely reflected strong turnaround in the first half compared to its recent years in operation. Unless a similar energy disaster like that of plummeting oil and iron ore prices (among other commodities) occurs in the latter half of this year, investors should expect Union Pacific to regain positive overall business growth this fiscal year.
The balance sheet, meanwhile, exhibited a mild increase in leverage (at 0.8 times) accompanied by a 4% year-over-year decline in book value.
In addition, Union Pacific has been overly generous to its shareholders, having allocated more than 1.5 times its free cash flow to just payouts in recent years.
Twenty-seven analysts have an average price target of $118.7 a share versus $103.66 at the time of writing. Assuming a meager 1% revenue growth applied to a three-year P/S average followed by a 15% margin indicates a per-share figure of $85.6.
In summary, Union Pacific is a hold.
Disclosure: I have shares of Union Pacific.
