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Union Pacific Stock Analysis | UNP Stock | $UNP Stock Analysis | Best Dividend Stock to Buy Now? - YouTube
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hello and welcome back to global value in today's聽
video we're going to be taking a look at the union聽聽
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pacific corporation ticker symbol unp and聽
be performing a fundamental stock analysis聽聽
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at the time of recording this video union pacific聽
is trading for 215 dollars per share year-to-date聽聽
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their stock price is down about 15 percent going聽
back over the past year they're down about two聽聽
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percent going back three years the stock price is聽
up eight percent compounded annually rebounding聽聽
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quite a bit from their sharp decline during covid聽
over the past 10 years the business has returned聽聽
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about 13 and a half percent compounded annually聽
and since 2005 the business has returned 16聽聽
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compounded annually so doing quite well even聽
throughout the global financial crisis and the聽聽
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pandemic keep in mind that these returns are not聽
including the dividends that union pacific pays聽聽
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out as well union pacific has seen a drawback from聽
their 52-week high they're closer to their 52-week聽聽
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low now but they've traded between 280 and 195聽
dollars so far over the past 52 weeks the business聽聽
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is a large business they have a market cap of 135聽
billion dollars so first for some background about聽聽
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the business omaha nebraska based union pacific聽
is the largest public railroad in north america聽聽
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operating on more than 30 thousand miles of track聽
in the western two-thirds of the united states聽聽
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union pacific generates revenue by hauling聽
coal industrial products intermodal containers聽聽
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agricultural goods chemicals and automotive goods聽
union pacific owns about one-fourth of the mexican聽聽
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railroad farrell max and derives about 10 percent聽
of its revenues overall by hauling freight to and聽聽
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from mexico the business has played a huge role聽
in american history and the company was founded in聽聽
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1862 and as mentioned is headquartered in omaha聽
nebraska we'll be performing an eight pillar聽聽
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analysis as popularized by everything money taking聽
a look at eight key financial metrics to come to a聽聽
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holistic and beginning fundamental understanding聽
of the business so let's get into it starting off聽聽
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with pillar number one we want the businesses聽
average five-year pe to be below 22 and a half聽聽
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currently they're trading at about 20 and a half聽
times earnings and over this time period they've聽聽
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traded at just about 20 times earnings so that's聽
gonna be a check to start off on pillar number one聽聽
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pillar number two we want their average five-year聽
return on capital to be above nine percent聽聽
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over the course of decades the return that you're聽
gonna get on a stock is gonna be approximately聽聽
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what its underlying business is able to return聽
and these business returns are gonna be captured聽聽
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by return on capital union pacific's returns聽
on capital are very stable and pretty steady聽聽
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the business is regulated by the government so聽
we're not seeing these really minuscule returns聽聽
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on capital and we're not seeing extreme returns on聽
capital either given union pacific's more or less聽聽
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uh dualopoly status very stable very steady聽
they earn about 15 return on capital over聽聽
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these five years that's another check on pillar聽
number two pillar number three we're looking for聽聽
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five-year revenue growth union pacific has grown聽
revenues just to smidge over this time period聽聽
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it's marginal revenue growth at best but it's聽
going to be another check on pillar number three聽聽
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pillar number four we're looking for five year net聽
income growth it looks like they had an atypical聽聽
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year in 2017 so pillar number four is going to聽
be an x last year they produced about six and a聽聽
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half billion dollars of net income pillar number聽
five we want to see decreasing shares outstanding聽聽
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when you purchase a share of stock what you're聽
really buying is a fractional ownership percentage聽聽
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in the underlying business when a business dilutes聽
existing shareholders by issuing new shares聽聽
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they're decreasing those shareholders聽
ownership percentage of the business聽聽
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and decreasing the percentage of the businesses聽
profits that the shareholder is entitled to聽聽
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many investors don't look at this but this can聽
really be a silent killer for investors overall聽聽
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when the opposite happens and a business decreases聽
their shares outstanding by buying back shares聽聽
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it actually increases your ownership percentage聽
in the business and increases the amount of the聽聽
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businesses profits that you're entitled to without聽
you having to pay a dime so that's what we're聽聽
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looking for here union pacific has bought back聽
about 145 million shares over this time period聽聽
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reducing their shares outstanding from 801 million聽
in 2017 down to 655 million in 2021 that's about聽聽
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18 of their shares outstanding so if you're an聽
existing shareholder over this time period you聽聽
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now own about 18 more of the business than what聽
your shares originally entitled you to so that's聽聽
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a great sign to see here and that's a check on聽
pillar number five pillar number six we're looking聽聽
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for five-year free cash flow growth free cash flow聽
is cash from operations minus capital expenditures聽聽
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it's this column in green free cash flow is the聽
lifeblood of any business and can be used to聽聽
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buy back shares pay dividends pay down debt make聽
acquisitions or reinvest back into the business聽聽
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a businesses abilities to produce free cash flows聽
is ultimately how that business is going to be聽聽
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valued so union pacific has grown free cash聽
flows from about 4 billion in 2017 to about聽聽
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6 billion in 2021 so that's another great sign聽
that's a check on pillar number six throughout聽聽
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this time period they've been able to decrease聽
their capital expenditures and increase their cash聽聽
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from operations and in an average year over this聽
time period they're producing about 5.2 billion聽聽
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dollars of free cash flow we'll be using that to聽
evaluate how the business utilizes leverage and聽聽
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then how the business's market cap compares to its聽
free cash flow profile pillar number seven we want聽聽
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union pacific's net debt which is their long and聽
short-term liabilities minus cash and short-term聽聽
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cash equivalents to be below their average聽
five-year free cash flow multiplied by five union聽聽
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pacific has about 30 and a half billion dollars of聽
net debt when we multiply their average five-year聽聽
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free cash flow of 5.2 billion dollars times five聽
that brings us to 26 billion dollars so while the聽聽
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business is more highly levered than what we want聽
on an average business union pacific employs a lot聽聽
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of assets in their business and they're operating聽
in a regulated dualopoly so while this is more聽聽
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debt than we'd like to see and it's gonna be an x聽
on pillar number seven this really doesn't concern聽聽
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me as the business has these fixed assets that聽
aren't going to go away anytime soon and they're聽聽
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trying to get the most out of them so that's聽
gonna be an x on pillar number seven finally聽聽
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the big pillar of the mall pillar number eight we聽
want union pacific's market cap to be below their聽聽
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average five-year free cash flow multiplied by聽
20. this is going to give us a beginning valuation聽聽
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of what's reasonable to pay for the business so聽
union pacific has a 131 billion dollar market cap聽聽
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when we multiply their average five-year free聽
cash flow of 5.2 billion dollars times 20聽聽
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that only brings us to 104 billion dollars聽
so that is gonna be an x on pillar number聽聽
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eight just because that's an x doesn't mean that聽
you're automatically going to write this one off聽聽
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this type of analysis is a fundamental starting聽
point it's not the deep dive that's required to聽聽
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make an investment decision and it's not any sort聽
of financial advice really to really be able to聽聽
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make the decision to invest into a business you聽
want to you have to be able to know it inside聽聽
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and out like you own 100 of the business lastly聽
union pacific is known as a dividend growth stock聽聽
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so we're going to be taking a look at its dividend聽
profile union pacific currently has a two and a聽聽
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half percent dividend yield and many investors聽
make mistakes by blindly chasing dividend yield聽聽
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instead we have to stop and pause and understand聽
if the businesses dividends are healthy and聽聽
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supported by the overall free cash flow looking聽
at this dividend profile the business has grown聽聽
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both dividends and free cash flows per share in聽
all five years they're paying less than half of聽聽
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their free cash flow per share out as dividends聽
so those are both great signs there it looks like聽聽
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union pacific may have a long runway ahead of them聽
to continue increasing their dividends over time聽聽
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their dividend profile looks like it is in great聽
shape here so in summary union pacific checks the聽聽
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box on five out of eight pillars it looks like it聽
is a great stable and steadily growing business聽聽
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that's been returning capital to shareholders by聽
increasing their dividends and buying back shares聽聽
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the business has also been able to grow revenues聽
and free cash flows while maintaining above聽聽
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average returns on capital however the businesses聽
current market cap looks like it's off from its聽聽
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ability to produce free cash flows union pacific聽
would definitely qualify as a great business聽聽
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warren buffett in his most recent聽
shareholder letter for berkshire hathaway聽聽
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stated that its main competitor bnsf burlington聽
northern santa fe railroad which is owned by聽聽
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berkshire is going to be a great american asset聽
that's gonna be incredibly important for america聽聽
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even a hundred years from now and there is no聽
reason to believe that he wouldn't have said聽聽
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the same thing about union pacific given that they聽
are more or less neck and neck competitors again聽聽
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this type of analysis is a starting point about聽
whether it's worth your while to learn more about聽聽
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the company and do further due diligence if you聽
want to learn more about union pacific i highly聽聽
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recommend checking out the businesses filings聽
diving into a 10k and reading through their聽聽
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annual reports that's it for today's fundamental聽
stock analysis of union pacific corporation聽聽
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ticker symbol unp if you enjoyed the video聽
please be sure to like the video subscribe聽聽
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to the channel for more stock analysis videos聽
and comment down below what business you want聽聽
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me to take a look at next time thanks for learning聽
about union pacific with me and have a great day
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