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Company: Union Pacific Corp (NYSE:UNP)
Last Updated: March 30, 2019
Model Approach: This model uses estimates of rail carloads and average revenue per car to forecast UNPs revenue, and ratio analysis to complete the financial statements.
Model Developer Summary: Overall, Union Pacific Corporation seems stable, and based on the enclosed valuation, the market does not appear to grossly undervalue or overvalue the firm.
UNP is not heavily dependent on leverage, which is positive in a time when interest rates are increasing. The firm also appears to be focused on implementing operating efficiencies into 2020. This highlights that near term operating expenses should be in-line with historical operating expenses. But, it could also signal the that the firm is anticipating and/or preparing for a decline in revenue within the next several years. The company's outlook for 2019 and 2020 seems stable, however, with margins expected to improve and revenue growth expected to outpace inflation (which the fed is currently forecasting long-term at 2%). Capital expenditures are in line with historical spending.
One concern is how UNP's revenue will perform beyond 2020. The company's largest segment is currently "premium", which contains domestic autos and international goods. Both of these areas could be greatly impacted due to economic uncertainty and/or trade dynamics between the US and other countries, which could occur in the later years of this analysis. To account for this risk, the "premium" segment's revenue performance is projected to lag the other three segments in the model in 2021. Other concerns include rising prices for diesel fuel (UNP's second largest operating expense; represented 18% of total 2018 operating expenses) and the market return investors expect in the next several years. Both are taken into account within the model to an extent, and support the statement that the market is not grossly overvaluing or undervaluing UNP.
Disclosure of conflicts of interest:
The model developer has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.