union pacific corporation april 18, 2013 dan ballantine & keaton j. cervantes
TRANSCRIPT
UNION PACIFIC CORPORATIONAPRIL 18, 2013
Dan Ballantine & Keaton J. Cervantes
Agenda
Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation
Union Pacific Corporation
Incorporated in 1862 Headquarters is located in Omaha,
Nebraska 45,928 full-time employees (86% under
union contract) Operates 31,868 miles of track Maintains a fleet of 8,391 locomotives Provides rail service to 23 states
throughout the Midwest, Western United States, and Mexico
Source: Union Pacific 2012 10-K
Macroeconomic Outlook
Continued decline in coal shipments
Shale oil boom causes supply bottlenecks
Push to modernize fleets End of drought brings
increased agricultural shipments
Increased production in Mexico
Source: Wall Street Journal
Macroeconomic Outlook
Keystone XL Pipeline Intended to relieve
the supply build-up in Midwest and Canada
Proposed route crosses the Ogallala Aquifer
Permit was denied on January 18, 2012 by President Obama
Source: keystone-xl.com
Macroeconomic Outlook
Keystone XL Pipeline Permit was denied
based on possible environment consequences
Recent pipeline failure in Arkansas has reignited fears of environmental impact of pipeline
Approval is uncertain at the moment
Source: Wall Street Journal
Macroeconomic Outlook
US-Mexico Rail Trade Steadily increasing
trade values in four major areas
Mexico Automotive Production: Projected to
increase 38% in the next three years due to higher labor costs in China Source: US DOT Federal Railroad
Administration, Bloomberg
Industry Forces Analysis
Industry Forces Analysis
Bargaining Power of Suppliers: HIGH Some inputs with no pricing power (fuel) Low number of locomotive and rail suppliers
Bargaining Power of Buyers: MEDIUM Relatively few industry competitors High number of alternatives
Threat of New Entrants: LOW Capital intensive business with high barriers to
entry Geographic specificity
Industry Forces Analysis
Threat of Substitutes: HIGH Many alternatives to transporting goods
including river barge, trucking, and pipeline Rivalry among Competitors: MEDIUM
Limited companies in the industry Limited direct competition due to
geographic differences of the main industry players
Company Overview
Source: Union Pacific Website
Company Overview
Freight Revenue (94%) Agricultural Automotive Chemicals Coal Industrial Products Intermodal
Other Revenue (6%)
2012 Freight Revenue
Source: Union Pacific 2012 10-K
Company Overview
Positives Revenue generated from chemical shipments
(including oil) is up 20% in 2012 45% of revenue from Mexico is through
automotive shipments As the drought weakens, agricultural
shipments will steadily increase Increase in fuel costs partially offset by fuel
surcharges Issues
Year-over-year reduction in shipments of coal
Company Overview
Source: Union Pacific 2012 10-K
Business Risk Analysis
SWOT Analysis
Strengths Weaknesses
- Excess cash reserves can allow UNP to upgrade fleet
- Rail lines provide access to shale oil reserves
- Strong operational efficiency
- Largely unionized workforce may lead to work stoppages
- Aging locomotive fleet
Opportunities Threats
- Continued growth in oil shipments
- Upgrade fleet to be more fuel efficient
- Increased trade between US and Mexico
- Keystone XL approval
- Economic downturn
- Continual decline in coal shipments
Strategy
Invest in network of rail and locomotives by replacing existing equipment, in addition to compliance with Positive Train Control (PTC)
Increase the use of fuel surcharges to reduce vulnerability to rising fuel costs
More efficient locomotives Increased shareholder returns through
additional dividend raises and share repurchases
Source: Union Pacific 2012 10-K
Management Outlook
Concern over decreased coal volume in 2013 Concerns over agricultural volume in the first
half of 2013 Long-term acceptance of the Keystone XL
pipeline Additional investment in intermodal terminals Additional growth opportunities through trade
with Mexico Target of sub-65% operating ratio by 2017
Source: Union Pacific Barclay’s Conference
Recent News
New CEO named in March 2012: Previous CEO took a medical leave due to cancer
2012 marked Union Pacific’s 150th year of existence
4Q 2012: record quarter profits in addition to most profitable year in company’s history
Record safety performance in 2012, despite a June 2012 collision of two Union Pacific trains in Goodwell, Oklahoma, killing three
Source: Union Pacific Website News Releases
Recent Financial Information
Source: Union Pacific 2012 10-K, 2010 10-K
Recent Financial Information
Source: Union Pacific 3/5/13 Raymond James Presentation
Operating Ratio
Current Stock Information
Source: Capital IQ, Yahoo Finance
Metric Value
Current Stock Price $136.94
Trailing P/E16.56
Forward P/E 14.58
Dividend Yield 2.02%
Market Cap($ millions)
$64,142.7
Financial Analysis
2008 2009 2010 2011 2012Current Ratio 0.98 1.37 1.16 1.12 1.16 Quick Ratio 0.36 0.43 0.58 0.61 0.64 Cash Ratio 0.43 0.69 0.37 0.37 0.34
2008 2009 2010 2011 2012Operating Profit Margin 22.68% 23.98% 29.36% 29.27% 32.23%Net Margin 13.01% 13.42% 16.39% 16.83% 18.84%ROA 6.01% 4.62% 6.50% 7.47% 8.55%ROE (Book Value) 15.07% 11.72% 16.02% 18.12% 20.51%
2008 2009 2010 2011 2012Debt/Assets 0.22 0.23 0.21 0.20 0.19 Debt/Equity 0.58 0.58 0.52 0.48 0.45 Interest Coverage 7.97 5.65 8.27 10.01 12.61
Liquidity Ratios
Profitability Ratios
Solvency Ratios
Financial Analysis
2008 2009 2010 2011 2012A/R Turnover 29.31 22.45 18.34 15.13 15.32 Days Sales Outstanding 12.45 16.26 19.90 24.12 23.83 Fixed Asset Turnover 0.51 0.39 0.45 0.50 0.51 Total Asset Turnover 0.46 0.34 0.40 0.44 0.45
2008 2009 2010 2011 2012Tax Burden 65.60% 67.98% 63.48% 63.90% 63.49%Interest Burden 87.46% 82.31% 87.91% 90.01% 92.07%Operating Profit Margin 22.68% 23.98% 29.36% 29.27% 32.23%Asset Turnover 45.24% 33.35% 39.37% 43.37% 44.38%Leverage 2.57 2.50 2.43 2.43 2.37 ROE 15.14% 11.20% 15.65% 17.72% 19.84%
Activity Ratios
DuPont Analysis
Comparable Companies
Source: Capital IQ
CompanyRevenue ($ millions)
Market Cap ($ millions)
Miles of Track
Revenue/ Track Miles
Canadian National Railway Company
$9,788 $41,697 20,100 $486,970
Canadian Pacific Railway Limited
$5,619 $21,644.6 14,400 $390,229
CSX Corp. $11,756 $25,038 21,000 $559,809
Kansas City Southern
$2,239 $11,876 6,300 $355,333
Norfolk Southern Corp
$11,040 $24,156 20,000 $552,000
Union Pacific Corporation
$20,926 $66,170 31,868 $656,646
Stock Performance
Source: Yahoo Finance
Comparable Company Analysis
Source: Capital IQ
Target CompanyTicker Symbol (Exchange)
Price/Book Value
Forward TEV/Sales
Forward TEV/EBITDA Forward P/E
Union Pacific Corporation UNP (NYSE) 3.40x 3.36x 8.00x 15.04
Comparable CompaniesCanadian National Railway Company CNR (TSX) 3.90x 4.61x 9.90x 16.22 Canadian Pacific Railway Limited CP (TSX) 4.40x 4.25x 11.40x 20.35 CSX Corp. CSX (NYSE) 2.80x 2.81x 7.30x 13.69 Kansas City Southern KSU (NYSE) 3.90x 5.60x 13.90x 26.10 Norfolk Southern Corp. NSC (NYSE) 2.50x 2.85x 7.80x 13.82
Comparable StatisticsHigh 4.40x 5.60x 13.90x 26.10 Median 3.90x 4.25x 9.90x 16.22 Low 2.50x 2.81x 7.30x 13.69 Mean 3.50x 4.02x 10.06x 18.04
Comparable Company Analysis
Source: Capital IQ
Multiple Low Median High MeanPrice/Book Value 103.68$ 161.73$ 182.47$ 145.15$ Forward TEV/Sales 110.83$ 178.63$ 242.19$ 167.99$ Forward TEV/EBITDA 122.88$ 174.30$ 253.40$ 177.46$ Forward P/E 128.59$ 152.35$ 245.16$ 169.41$
Implied UNP Share Price
Multiple Weight Implied UNP Stock Price
Price/Book Value 30% 145.15$ Forward TEV/Sales 30% 167.99$ Forward TEV/EBITDA 15% 177.46$ Forward P/E 25% 169.41$
UNP Implied Stock Price 162.91$
Discount Rate
CAPM
Risk-Free Rate 3.12%Market Risk Premium 6.00%5-Year Beta 0.74
CAPM Cost of Equity 7.53%
Year Actual1 33.55%2 13.93%3 29.44%4 66.00%5 -27.50%
Total Realized Return 137.03%
Arithmetic Annual Return 23.08%Geometric Annual Return 18.84%
Annual Realized Returns
Discount Rate
Share Price 141.27$ Shares Outstanding (millions) 468.40 Market Value of Equity 66,170.87$
Debt 8,997.00
Percent Equity Weight 88.03%Percent Debt Weight 11.97%
Cost of Debt 5.95%Cost of Equity
CAPM Cost of Equity 7.53% 60.00%UNP Realized Return 18.84% 40.00%
Cost of Equity 12.05%
Tax Rate 38.0%
WACC 11.05%
Weighted Average Cost of Capital
Cost of Equity Weightings
DCF Analysis
2013E 2014E 2015E 2016E 2017E Terminal ValueNet Income 4,671 5,483 6,149 7,057 8,152 Depreciation 1,869 1,836 1,924 2,014 1,925 Capital Expenditures (3,600) (3,700) (3,800) (3,500) (2,300) Changes in Net Working Capital
Less Increases in A/R (101) (139) (138) (120) (19) Less Increases in Inventories (104) (103) (79) (70) (93) Plus Increases in A/P 418 451 481 468 434
Free Cash Flow 3,153 3,828 4,537 5,849 8,098 103,578 Present Value 2,839 3,104 3,312 3,846 4,794 61,322
Discount Rate 11.05%
Calculation of Implied Share Price Terminal ValueImplied Enterprise Value 79,218$ Terminal Growth Rate 3.00%Less Debt (8,997)$ Plus Cash 1,063$ Implied Market Cap 71,284$
Implied Share Price 152.19$
Union Pacific Corporation Discounted Cash Flow Analysis ($ millions)
Decision Drivers
Strengths Improved operating ratio and efficiency Short-term growth in oil transportation in
addition to longer-term growth in Mexico Management’s plan to return cash to
shareholders GICS Diversification
Concerns Sensitivity to approval of Keystone XL pipeline Declining demand for coal
Recommendation
Valuation Summary Current Stock Price: $136.94 per share Comparable Companies Valuation: $162.91
per share DCF Valuation: $152.19 per share
Recommendation: BUY Buy 100 shares at current market price 100 shares at current market price =
$13,694
Questions?