Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Union Pacific Are Railroads still a Value Investment?

Falling revenues are undermining the popular notion that railroad stocks are a value investment. The latest railway to put this idea to the test is the Union Pacific (NYSE: UNP); which saw its revenues fall by $2.93 billion in a year.

The UP reported revenues of $23.96 billion in March 2015 that fell to $21.03 billion in March 2016, ycharts data indicates. The chart shows us that Union Pacific lost revenue during every quarter of 2015, and for the first quarter of 2016. The railroad’s revenues fell by $780 million during first quarter 2016 alone.

This contrasts dramatically with the steady revenue gains; Union Pacific experienced for every quarter between June 2011, and December 2014. Judging by the charts, the UP is struggling just to maintain revenue.

The Los Angeles Railyards UP inherited from the Southern Pacific.
The Los Angeles Railyards UP inherited from the Southern Pacific.

Is Union Pacific Losing Money?

The sorry state of Union Pacific’s revenue is beginning to eat away at the company’s income. In March 2015, the UP reported a net income of $5.243 billion that fell to $4.60 billion a year later. That makes for a loss of $643 million, which shows us that the revenue fall is beginning to affect the bottom line.

The good news for UP stockholders is that this drop is not affecting their returns yet. Union Pacific rewarded investors with a dividend yield of 2.69%; an earnings per share ration of 5.348 and a return on equity of 22.15% for first quarter 2016. The company also managed to retain a profit margin of 20.27% for the same time period.

Union Pacific still has a lot of cash; for a railroad, it reported a free cash flow of $1.486 billion on March 31, 2016. That was a strong improvement over March 2015, when the company’s free cash flow was $963 million. This signals that the company could have some serious float.


That sentiment is backed up by the cash from operations number. Union Pacific reported making $7.453 billion in cash from operations for the first quarter of 2016. Not surprisingly that number was down from first quarter 2015; when the company reported $7.682 billion in cash from operations, but not down by much. The cash from operations fell by $229 million according to my math.

Union Pacific is Stashing a Lot of Cash Away

Cash and short-term investments were also very healthy. Union Pacific reported having $2.673 billion in the bank on March 31, 2016. That was $1.086 billion more than first quarter 2015 when the company reported $1.587 billion in cash and short-term investments.

So Union Pacific is losing money, but it has a very shrewd management team; that is stashing cash away for a rainy day – that is obviously here. The management realizes that railroad revenues are declining; and will keep declining for the foreseeable future, because of the collapse in commodities prices.

More importantly the management is taking advantage of the savings from lower fuel costs to stash away more cash. That’s a very shrewd move that could help Union Pacific with acquisitions or investments in new technologies such as the vaunted Hyperloop. Interestingly enough the Hyperloop is being tested right in UP’s backyard; in North Las Vegas, Nevada, by Hyperloop One.

Another way the Union Pacific is taking advantage of the savings from lower fuel costs, is by investing in infrastructure improvement now; while fuel and construction costs are lower. The company is planning to spend $58 million to improve its rail infrastructure in Louisiana, according to a recent press release.

[MOJAVE NATIONAL PRESERVE: The Union Pacific, an hourly sight (and sound) in the Mojave. The singing Kelso Dunes are in the background.] *** []
[MOJAVE NATIONAL PRESERVE: The Union Pacific, an hourly sight (and sound) in the Mojave. The singing Kelso Dunes are in the background.] *** []
Union Pacific is also planning to spend $3.75 billion on rail improvements this year. That is a very shrewd investment, although skeptics will wonder if it is necessary in light of the fall in commodities prices. My response is that it’s a smart move to take advantage of lower fuel prices – after all bulldozers and power shovels run on diesel fuel which is cheap right now.

Is Union Pacific a Good Investment?

Union Pacific is still a good long term investment because it is undervalued. The railroad had a market cap of $68.99 billion and an enterprise value of $81.83 billion on May 23, 2016. It also had assets of $55.77 billion, liabilities of $35.3 billion and a long term debt of $15.19 billion.

This makes Union Pacific a good long term buy and hold play, but I would hold off on purchasing it right now. My guess is that railroad stocks are about to fall in price and keep falling for some time because of the recent revenue reports. My prediction is that UP will probably hit bottom sometime this summer.

Therefore I would classify Union Pacific as a stock to watch. Don’t buy it because it will get cheaper, but hold it if you have it because this railroad will not lose money in the near future.