Union Pacific

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Union Pacific

• Financial Analysis

FINA 4332 Corporate Finance Spring 2005 Group
Members Jennifer Bang Rick Guerrero Keith
McKeand Han Nguyen Lien Nguyen Leila Quezada
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(No Transcript)
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Vision Statement Union Pacific is committed to
be a company where our customers want to do
business our employees are proud to work and
shareholder value is created
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• First Transcontinental Railroad
• 1869

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Historical Timeline

• 1969 Established as a holding company UPRR is
  an operating company
• Merger Summary
• 1982 Missouri Pacific (MOP) and Western Pacific
• 1988 Missouri-Kansas-Texas (Katy) Railroad
• 1995 Chicago and Northwestern (CNW)
• 1996 Southern Pacific (SP) Railroad

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Operations

• Only railroad to serve all six gateways to Mexico
  
• One of the most diversified commodity mixes
• Largest customer is APL Limited Second is
  General Motors
• Nation's largest hauler of chemicals
• Hauls 240 million tons of coal annually

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Employees

• 48,000 full time employees
• 85 unionized 14 Unions

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• Freight 7,056 97.14
• Switch 468 2.81
• Passenger 7 .05
• Total 7,531 100.00
• Freight Average Age 13.56
• Non-Freight Average Age 27.22
• ALL Locomotives Average Age 14.72
• 1.3 BILLION gallons of fuel per year

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• Covered Hopper 29,374
• Boxcar 18,691
• Open-Top Hopper 13,489
• Gondolas 14,955
• Other 11,296
• TOTAL 87,805
• Non-UP Cars in System 317,674

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Board of Directors

• Board Size 10-12
• Max of 2 Officers on Board
• Current Compensation 90,000
• Equity Ownership 3 Times

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Executive Officer Profiles

• Richard K. DavidsonChairman, CEO, and President
  Union Pacific CorporationSalary (2004)
  1,350,000
• Security Ownership 647,125 Shares
• James R. YoungChairman, COO, and President Union
  Pacific RailroadSalary (2004) 545,417
  Security Ownership 129,280 Shares
• Dennis J. DuffyEVP OperationsSalary
  (2004) 485,000 Security Ownership 128,194
  Shares

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Ownership
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Commodities

• Agricultural
• Whole Grains
• Grain Products
• Food and Beverages
• 14 of Total Revenue
• 1.675 million
• Up 6 from 2003

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Commodities

• Automotive
• New automobiles
• Serving
• - 7 domestic vehicle manufacturing plants
• - 6 west coast ports (imported vehicles)
• - Port of Houston (imported vehicles)
• - 42 vehicle distribution centers that serve all
  major western cities
• 11 of Total Revenue
• 1.235 million
• Up 2 from 2003

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Commodities

• Chemicals
• Serving large chemical producers along Gulf
  Coast and Rocky Mountain Region
• Petrochemicals
• Fertilizer
• Soda Ash
• 15 of Total Revenue
• 1.719 million
• Up 8 from 2003

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Commodities

• Energy
• Coal and Petroleum Coke
• Coal for electricity
• Petroleum Coke - for aluminum, steel, and
  cement
• 20 of Total Revenue
• 2.404 million
• Up 0 from 2003

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Commodities

• Industrial Products
• Stone
• Cement
• Minerals
• Waste and Scrap
• Lumber
• Paper
• 21 of Total Revenue
• 2.419 million
• Up 11 from 2003

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Commodities

• Intermodal Bulk containers
• International
• Domestic
• Premium

19 of Total Revenue 2.240 million Up 8 from
2003
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UP Revenue by Commodity (2004)
14.3
18.7
11.0
19.7
14.4
21.8
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The Railroad Industry
Top 5 Railroad Companies by Revenues
14.8
10.1
13.6
20.4
22.8
18.2
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Competition

• Chief competitor Burlington Northern
• CSX and Norfolk Southern operate primarily in the
  East
• Canadian National operates primarily in Canada
• Trucks

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Valuation Ratios
Satisfactory
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Dividend Ratios
Satisfactory
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Growth Rates
Poor
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Financial Strength
Fair
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Profitability Ratios
Fair
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Management Effectiveness
Fair
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Efficiency Ratios
Fair
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Ratio Analysis Conclusion
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Market Evaluation
5-Year Stock Price with Corresponding Trading
Volumes
Aggregate market value 15,116,771,158 Shares
outstanding 260,998,036
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Industry Market Capitalization
Top 5 Railroad Companies by Market Capitalization
19.5
10.0
16.08
21.3
14.6
18.5
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Holding Period Returns
Closing Price on April 22, 2005 64.48
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FCFE Model
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Cost of Equity (Discounted Cash Flow Model)
2005 Growth Rate is analysts mean target
estimate
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Cost of Equity (Constant Dividend Growth Model)
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Cost of Equity (Capital Asset Pricing Model)
Beta COV(RUNP, RSP500)/VAR(RSP500)
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Capital Asset Pricing Model Conclusion
UP is currently Underpriced because Ke (DCF) gt
Ke (CAPM) 0.2025 gt 0.0343
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Market Efficiency
Associated PressUP Raises 1Q Earnings
EstimateTuesday March 22, 439PM ET On Strong
Revenue Growth, Quick Storm Recovery
Weak-Form Efficient Market
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Market Efficiency
Associated PressFed Raises Rates to Check
InflationTuesday March 22, 215PM ET Fed Pushes
Key Interest Rate Up by 0.25 to 2.75 to Check
Inflation
Weak-Form Efficient Market
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Capital Structure
UP has no Preferred Stock
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Capital Structure
Our construct of the WACC as a Function of Debt
to Total Assets, did not conform to an MM model
of Capital structure. Our 3-year data set is too
limited to accurately determine the optimum cost
of capital.
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Capital Structure

• BUT, relatively constant capital structure over
  the three years examined
• optimal capital structure must be approximately
  35 debt and 65 equity.

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Strengths and Weaknesses
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Expectations Concerns

• Expected to outperform the market over the next 6
  months with average risk
• Service issues over the past 12 months due to
  capacity and manpower issues
• Rising cost of fuel

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Investment Recommendation
Our recommendation is to BUY Union Pacific
shares. A low beta and a cost of equity
significantly higher than the market indicate
that Union Pacific shares are under-priced.
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Conclusion

• Long-Term Historical Leader
• Recovery almost complete
• Diversified Commodity Mix
• Strong fundamentals
• Low-Risk, Moderate Growth
• Buy Union Pacific Shares