UNP Union Pacific Corporation Sector: Industrials SELL

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1 Analysts: Zachary Haller, Andrew Paley Brown and Sean Miller Washburn University Applied Portfolio Management UNP Sector: Industrials SELL Report Date: 4/18/2016 Market Cap (mm) $66,871 Annual Dividend $ Yr Beta (S&P 500 Index) 1.12 Return on Capital 10. Dividend Yield 2.8% Annualized Alpha 35.4% Compared With: EPS (ttm) $5.51 Price/Earnings (ttm) 14.0 Institutional Ownership 9. CSX Corp. Current Price $77.20 Economic Value Added (ttm) $727 Short Interest (% of Shares) 1.6% Norfolk Southern Corporation 12 mo. Target Price $85.00 Free Cash Flow Margin 12.3% Days to Cover Short 1.9 and the S&P 500 Index Business Description, through its subsidiary, Union Pacific Railroad Company, operates railroads in the United States. It offers freight transportation services for agricultural products, including grains, commodities produced from grains, and food and beverage products; automotive products, such as finished vehicles and automotive parts; and chemicals comprising industrial chemicals, plastics, fertilizers, petroleum and liquid petroleum gases, crude oil, and soda ash. The company also provides transportation services for coal and petroleum coke; industrial products consisting of construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products; and intermodal import and export containers and Investment Thesis As the US economy wavers, and with the decreasing demand of freight we are pessimistic about the stock. We are concerned that UNP will struggle to create value for the portfolio in the short term. UNP has current returns below the S&P and saw an increase in their beta from 1 to Union Pacific s 3 Year CAGR s shows Total Revenue growth of 1.4%, EBIT growth of 6.1%, Earning Per Share growth of 9.8%, Dividends Per Share growth of 20.9%, and Total Invested Capital growth of 5.3%. With these numbers decrease from last years thesis Union Pacific shows continuous declining growth, yet efficiency in their margin. While UNP is a central and midwest leader in the railroad industry we are convinced the company's stock was overvalued and recommend to sell it in our portfolio. ANNUALIZED 3 YEAR CAGR Total Revenue 1.4% Free Cash Flow 5.2% EBIT 6.1% Total Invested Capital 5.3% NOPAT 6. Total Assets 5. Earnings Per Share 9.8% Economic Value Added 11.2% Dividends Per Share 20.9% Market Value Added 5.9% UNP CSX NSC UNP ^SPX ROA ROE ROIC Margins and Yields Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield Per Share Metrics Earnings Dividends NOPAT Free Cash Flow 29.3% 32.2% 33.9% % N/A % 11.6% 12.3% 6.4% 6.6% 5.6% 4.8% % % 1.6% 2.8% N/A $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 EBIT Net Operating Profit After Tax $1,600 $1,400 $1,200 $1,000 $800 $ Economic Value Added Market Valued Added $90,000 $80,000 $70,000 $60,000 $50,000,000 $30,000,000 $10, Price/Earnings Price/Free Cash Flow Datasource: Capital IQ

2 UNP Sector Industrials CSX Corp. CSX Sector Industrials Income Statement Highlights Income Statement Highlights Total Revenue 19,557 20,926 21,963 23,988 21,813 Total Revenue 11,795 11,763 12,026 12,669 11,811 Cost of Goods Sold 11,434 11,633 11,891 12,407 10,825 Cost of Goods Sold 7,349 7,240 7,449 7,866 7,012 Gross Profit 8,123 9,293 10,072 11,581 10,988 Gross Profit 4,446 4,523 4,577 4,803 4,799 SG&A Expense SG&A Expense R&D Expense R&D Expense Dep. & Amort. 1,617 1,760 1,777 1,904 2,012 Dep. & Amort ,059 1,104 1,151 1,208 Other Oper. Exp Other Oper. Exp Operating Income 5,724 6,745 7,446 8,753 8,052 Operating Income 3,470 3,464 3,473 3,652 3,591 Interest Expense (572) (535) (526) (561) (622) Interest Expense (552) (566) (562) (545) (544) Other Non Oper. Exp Other Non Oper. Exp (13) 33 EBT ex Unusuals 5,226 6,289 7,016 8,260 7,512 EBT ex Unusuals 2,940 2,914 2,922 3,099 3,086 Total Unusual Exp Total Unusual Exp (55) 52 Earnings Before Tax 5,264 6,318 7,048 8,343 7,656 Earnings Before Tax 2,940 2,971 2,922 3,044 3,138 Income Tax Expense 1,972 2,375 2,660 3,163 2,884 Income Tax Expense 1,086 1,108 1,058 1,117 1,170 Net Income 3,292 3,943 4,388 5,180 4,772 Net Income 1,854 1,863 1,864 1,927 1,968 Earnings per Share $3.39 $4.17 $4.74 $5.77 $5.51 Earnings per Share $1.71 $1.79 $1.83 $1.93 $2.00 Dividends per Share.97 $1.25 $1.48 $1.91 $2.20 Dividends per Share Effective Tax Rate 37.46% 37.59% 37.74% 37.91% 37.67% Effective Tax Rate 36.94% 37.29% 36.21% % Total Common Shares Total Common Shares 1,083 1,038 1,019 1, Year end Stock Price $ $ $ $ $ Year end Stock Price $ $ $ $ $ Balance Sheet Highlights Balance Sheet Highlights Assets Assets Cash and Equivalents 1,217 1,063 1,432 1,586 1,391 Cash and Equivalents Short Term Investments Short Term Investments Total Cash & ST Invest. 1,217 1,063 1,432 1,586 1,391 Total Cash & ST Invest. 1,306 1,371 1, ,438 Total Receivables 1,401 1,331 1,414 1,611 1,356 Total Receivables 1,000 1,114 1,052 1, Inventory Inventory Prepaid Expenses Prepaid Expenses Total Current Assets 3,727 3,614 3,990 4,401 4,130 Total Current Assets 2,806 2,953 2,602 2,572 2,966 Net PPE 39,583 41,637 43,324 45,720 48,305 Net PPE 24,974 26,050 27,291 28,584 30,174 Total Assets 45,096 47,153 49,731 52,372 54,600 Total Assets 29,344 30,723 31,782 33,053 35,039 Liabilities and Equity Liabilities and Equity Accounts Payable Accounts Payable 1, Accrued Expenses Accrued Expenses Short Term Debt Short Term Debt Total Current Liab. 3,317 3,119 3,791 3,764 3,206 Total Current Liab. 2,558 2,645 2,424 2,107 1,952 Long Term Debt 8,697 8,801 8,872 10,952 13,607 Long Term Debt 8,734 9,052 9,022 9,514 10,683 Total Liabilities 26,518 27,276 28,506 31,183 33,898 Total Liabilities 20,876 21,587 21,278 21,877 23,371 Preferred Equity Preferred Equity Common Stock & APIC 5,417 5,499 6,984 7,096 7,193 Common Stock & APIC 1,049 1,020 1, Retained Earnings 19,508 22,271 23,901 27,367 30,233 Retained Earnings 8,275 9,010 9,936 10,734 11,238 Treasury Stock (5,293) (6,707) (8,910) (12,064) (15,529) Treasury Stock Total Common Equity 18,578 19,877 21,225 21,189 20,702 Total Common Equity 8,455 9,122 10,483 11,152 11,652 Total Equity 18,578 19,877 21,225 21,189 20,702 Total Equity 8,468 9,136 10,504 11,176 11,668 Total Liab. and Equity 45,096 47,153 49,731 52,372 54,600 Total Liab. and Equity 29,344 30,723 31,782 33,053 35, Margins and Profitability UNP, Page 2 of 17 Copyright Robert A. Weigand, Ph.D., 2016

3 UNP CSX CSX Corp. Profit Margins Profit Margins Gross Profit Margin % 45.9% 48.3% 50.4% Gross Profit Margin 37.7% % 37.9% 40.6% Operating Profit Margin 29.3% 32.2% 33.9% % Operating Profit Margin 29.4% 29.4% 28.9% 28.8% 30.4% Net Profit Margin 16.8% 18.8% % 21.9% Net Profit Margin 15.7% 15.8% % 16.7% Free Cash Flow Margin N/A % 11.6% 12.3% Free Cash Flow Margin N/A 6.1% 12.4% % Gross Profit Margin Operating Profit Margin Gross Profit Margin UNP CSX Gross Profit Margin Operating Profit Margin Operating Profit Margin UNP CSX Net Profit Margin UNP CSX Free Cash Flow Margin UNP CSX Gross Profit Margin: The gross profit margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company.gross profit margin increases steadily from 41. in 2011 to 50.4% in 2015, (approximately $8 billion to $11 billion). CSX has grown their gross profit margin from 37.7% in 2011 to 40.6% in The important thing to note is that with UNP, we have seen a decrease in cost of goods sold by nearly $1 billion while simultaneously increasing revenue $2 billion from 2011 to Even when UNP saw a decline in revenue, they were still able to increase the gross profit margin. EBIT Margin (Operating profit margin): EBIT/Operating margin is a measurement of a company's operating profitability. This margin can provide an investor with a cleaner view of a company's core profitability. CSX s operating profit margin expands from 29.4% to 30.4%, which is a respectable improvement. More impressively, UNP s operating margin expands from 29.3% to 36.9% during the same period. We can conclude that during this 5 year period UNP was vastly superior in increasing their core profitability. 2 Net Profit Margin:Net profit margin, is the ratio of net profits revenues, which shows how much of each revenue dollar earned is translated into bottom line profits.unp s net profit margin increased from 16.8% in 2011 to 21.9% in CSX has also seen an increase in net profit margin, but at a slower rate, from 15.7% in 2011 to 16.7% in We concluded from this that UNP has been able to grow their net profit margin at afaster rate than CSX, this again is due to UNP s ability to grow revenues at a rate faster than they accrue expenses. UNP s ability to continuously increase net profit margins, further reinforces our impression that the company is particularly well managed. Free Cash Flow Margin:Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. We want to make sure that accounting profits are backed up by tangible free cash flows. UNP has seen a steady increase of its free cash flow margin, from 11% in 2012 to 12.3% in 2015.Their competitor has a much more volatile free cash flow margin, peaking in 2013 at 12.4% then decreasing down to.3% by CSX is a stark contrast in reliability compared to UNP; UNP s free cash flow margin supports the other profit margin increases. We would be concerned if UNP s free cash flow margins mirrored that of CSX s. Profit margin synthesis: Even though we saw decreases in total revenue in 2015, we saw increases in total gross, operating, and net profit margins, along with support from the free cash flow margin, which indicates efficiencies in the income statement. UNP has posted noteworthy financial results during sluggish 2015 economic period. 3 1 Our average price per gallon of diesel fuel in 2015 decreased 38% from the average price in 2014, as both crude oil and the conversion spreads between crude oil and diesel declined in The lower price decreased operating expenses by $1.2 billion (excluding any impact from year over year volume declines). Gross ton miles decreased 9%, which also decreased fuel expense. These declines were partially offset by a 1% increase in our fuel consumption rate, computed as gallons of fuel consumed divided by gross tonmiles in thousands k report And you know I like this deep research everything is relevant to UNP, and the writing is concise, objective and accurate. 2 UNP benefited in prior years by passing along higher fuel costs to customers (the surcharge). In 2015, UNP benefited again from the sudden decline in oil prices, we believe there is a surcharge effect , and a lower fuel cost effect in Refer to Washburn s APM macro finance economic outlook for This section is really good now we're digging deep, reporting accurately, and reaching definite, objective conclusions that bear on UNP as an investment. 1. Margins and Profitability UNP, Page 3 of 17 Copyright Robert A. Weigand, Ph.D., 2016

4 UNP CSX CSX Corp. Profitability Ratios Profitability Ratios Net Profit Margin 16.8% 18.8% % 21.9% Net Profit Margin 15.7% 15.8% % 16.7% Total Asset Turnover Total Asset Turnover = Return on Assets 7.3% 8.4% 8.8% 9.9% 8.7% = Return on Assets 6.3% 6.1% 5.9% 5.8% 5.6% Equity Multiplier Equity Multiplier = Return on Equity 17.7% 19.8% 20.7% 24.4% 23.1% = Return on Equity 21.9% 20.4% 17.7% 17.2% 16.9% 3 Return on Assets Return on Equity 0.5 Total Asset Turnover UNP CSX 2 Return on Assets Return on Equity Equity Multiplier UNP CSX Return on Assets UNP CSX Return on Equity UNP CSX Analyst Comments: Total asset turnover: The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. UNP s total asset turner has remained relatively constant from 2011 to 2015, at.4. Total revenue and total assets are increasing at a similar rate, which is why asset turnover has remained constant. 4 With a constant total asset turnover rate, any increase in net profit margin directly increases return on assets. Return on assets:roa shows how efficient management is at using its assets to generate earnings. The decrease in 2015 on ROA is due to the slight decrease in total asset turnover from 2014 to 2015, and not from a net profit margin decreasing. CSX s ROA has decreased every year, due to a decreasing total asset turnover, complied with an erratic net profit margin. UNP has an advantage on return on assets due to a consistent asset turnover and increasing net profit margin. Return on equity / equity multiplier: Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. CSX s return on equity has decreased in 2011, from 21.9% to 16.9% in UNP on the other hand has been able to increase their return on equity from 17.7% in 2011 to 23.1% in 2015; this is a direct result of an increase in equity multiplier and ROA. The change in equity multiplier is due to UNP seeing an accelerated increase in total assets while simultaneously seeing only a modest increase in total equity. Therefore, we found UNP to be superior in profitability ratios when compared to CSX. 4 Union Pacific has significant pricing power, allowing it to lock in more profitable contracts. Argus 1. Margins and Profitability UNP, Page 4 of 17 Copyright Robert A. Weigand, Ph.D., 2016

5 UNP CSX CSX Corp. Multiples and Yields Multiples and Yields Price/Earnings Price/Earnings Price/Book Price/Book Price/Free Cash Flow N/A Price/Free Cash Flow N/A Earnings Yield 6.4% 6.6% 5.6% 4.8% 7. Earnings Yield 8.1% 9.2% % 7.7% Dividend Yield 1.8% % 1.6% 2.8% Dividend Yield 2.1% 2.8% 2.1% 1.7% 2.7% Price/Earnings Price/Free Cash Flow Price to Earnings UNP CSX Price/Earnings Price/Free Cash Flow Earnings Yield Dividend Yield Earnings Yield UNP CSX Earnings Yield Dividend Yield Price to Book UNP CSX Dividend Yield UNP CSX Price to Free Cash Flow UNP CSX Price/Earnings:The P/ E ratio, or P/ E multiple, expresses a stock's price as a multiple of its earnings over the past 12 trailing months. As we can see in this chart, UNP s P/E ratio had seen increases from 2011 through 2014, or 15.6 to However, in 2015, UNP s P/E ratio dropped to a 5 year low of While we did see a drop in P/E ratio we still see that they are in the reasonable range of sitting at CSX s P/E ratio followed a similar pattern, increasing from 12.3 in 2011 to 19.1 in 2014, and then dropping to 13.1 in UNP s price to earnings dip follows a sector wide price to earnings downtrend, The P/e ratio decreased because the market is willing to pay less in 2015 than they were in 2014 based on their projected future earnings. Earnings Yield: Earnings yield expresses net income (ttm) as a percentage of the price investors are currently paying to buy a fractional claim on that net income.unp s earnings yield declined from 2011 through 2014, from 6.4% to 4.8% then increasing to 7% in CSX s earnings yield has also declined from 2011 through 2014, increasing to 7.7% in 2015.UNPs earning yield increased therefore indicating the market is pricing their stock more cheaply relative to their earnings. Dividend Yield: Dividend yield indicates how much a company pays out in dividends each year relative to its share price. UNP s dividend yieldona 5 year basis, has increased from 1.8% to 2.8%. CSX s dividend yield has also increased since 2011, but at a much slower pace. UNP continued to increase their dividends from 2011 to 2015, however their stock price from 2011 to 2014 outpaced their dividends. Even though in 2015 their stock price fell, UNP increased their dividends by 1 which is why we saw a an increase from 1.6% to 2.8% 6 This continuous increase in dividend yield shows investors that UNP is confident in the future of the company, and for dividend seeking investors this is a good sign. 5 Additionally, we must build or acquire and maintain our rail system; trucks and barges are able to use public rights of way maintained by public entities 10k 6 $4.5 billion for cash was used in investing activities and a (UNP had a)1 increase in dividends declared per share. 2. Relative Valuation and Debt UNP, Page 5 of 17 Copyright Robert A. Weigand, Ph.D., 2016

6 UNP CSX CSX Corp. Liquidity and Debt Liquidity and Debt Current Ratio Current Ratio Quick Ratio Quick Ratio Days Sales Outstanding Days Sales Outstanding Inventory Turnover Inventory Turnover Total Debt to Assets 19.3% 18.7% 17.8% 20.9% 24.9% Total Debt to Assets 29.8% % 28.8% 30. Long Term Debt to Equity 46.8% 44.3% 41.8% 51.7% 65.7% Long Term Debt to Equity 103.3% 99.2% 86.1% 85.3% 91.7% Times Interest Earned Times Interest Earned Current Ratio Quick Ratio Current Ratio UNP CSX Current Ratio Quick Ratio Days Sales Outstanding Inventory Turnover Total Debt to Assets UNP CSX Days Sales Outstanding Inventory Turnover Total Debt to Assets Long-Term Debt to Equity Long-Term Debt to Equity UNP CSX Total Debt to Assets Long-Term Debt to Equity Analyst Comments: Current Ratio:The current ratio is simply current assets over current liabilities, a quick check to make sure the company's short term liabilities can be covered by liquid short term assets. UNP s current ratio has maintained between the range of 1.05 and CSX s has seen relatively similar movement in the current ratio during this period, but saw a significant high of 1.52 in 2015 (attributed to an increase in total current assets and a decrease in total current liabilities). We found this ratio to be inconclusive as it has remained within the reasonable range for both companies. We can conclude UNP has adequate liquidity. Total Debt to Assets:Total debt to assets defines the total amount of debt relative to assets. UNP s debt to assets decreased from 2011 to 2013, from 19.3% to 17.8%. However, in 2014 UNP s total debt to assets increased to 20.9%, then increased again to 24.9% in CSX s total debt to assets has also increased over this 5 year period, from 29.8% to 30.. UNP has been using debt to purchase long lived assets as stated in their 10k. 7 From this we have concluded that management feels confident in the future financial security of their company, and UNP is using debt to finance their long lived assets. Long Term Debt to Equity: Long term debt to equity is used to measure a company s financial leverage; the ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in the shareholders equity. UNP s long term debt to equity ratio has steadily increased from 2011 to 2015, from 46.8% to 65.7% (or $8.7 billion to $13.6 billion). CSX has seen a decline in debt to equity over the 5 year period, from 103.3% to 91.7%. Though CSX is reducing their long term debt to equity, they have a significantly higher amount of debt relative to shareholder equity. As previously stated we concluded that UNP was financing long lived assets with more debt, therefore this explains why long term debt to equity has also been increasing. (See notation 6) 7 Higher capital investments, including the early buyout of the long term operating lease of our headquarters building for approximately $261 million, drove the increase in cash used in investing activities in 2014 compared to Significant investments also were made for new locomotives, freight cars and containers, and capacity and commercial facility projects. Capital investments in 2014 also included $99 million for the early buyout of locomotives and freight cars under long term operating leases, which we exercised due to favorable economic terms and market conditions. Higher capital investments in locomotives and freight cars, including $327 million in early lease buyouts, which we exercised due to favorable economic terms and market conditions, drove the increase in cash used in investing activities in 2015 compared to Relative Valuation and Debt UNP, Page 6 of 17 Copyright Robert A. Weigand, Ph.D., 2016

7 UNP CSX CSX Corp. Total Invested Capital Total Invested Capital Total Cash and ST Investments 1,217 1,063 1,432 1,586 1,391 Total Cash and ST Investments 1,306 1,371 1, ,438 + Receviables 1,401 1,331 1,414 1,611 1,356 + Receviables 1,000 1,114 1,052 1, Inventory Inventory Accounts Payable Accounts Payable 1, Accrued Expenses Accrued Expenses = Net Oper. Working Capital 1,514 1,373 1,839 2,096 1,855 = Net Oper. Working Capital 846 1, ,405 + Net Property, Plant & Equip. 39,583 41,637 43,324 45,720 48,305 + Net Property, Plant & Equip. 24,974 26,050 27,291 28,584 30,174 = Total Invested Capital 41,097 43,010 45,163 47,816 50,160 = Total Invested Capital 25,820 27,272 27,999 29,365 31,579 Total Weighted Shares Total Weighted Shares 1,083 1,038 1,019 1, = Total Invested Capital/Share $42.31 $45.46 $48.75 $53.30 $57.91 = Total Invested Capital/Share $23.84 $26.27 $27.48 $29.34 $32.13 Net Property, Plant & Equip. Total Invested Capital Total Invested Capital per Share UNP CSX Net Property, Plant & Equip. Total Invested Capital $60,000 $50,000,000 $30,000,000 $10,000 $70 $60 $50 $30 $10 $35,000 $30,000 $25,000,000 $15,000 $10,000 $5, UNP CSX CSX Corp. NOPAT and Free Cash Flow NOPAT and Free Cash Flow Operating Income (EBIT) 5,724 6,745 7,446 8,753 8,052 Operating Income (EBIT) 3,470 3,464 3,473 3,652 3,591 (1 Effective Tax Rate) % 37.7% 37.9% 37.7% (1 Effective Tax Rate) 36.9% 37.3% 36.2% 36.7% 37.3% = Net Oper. Profit After Tax 3,580 4,209 4,636 5,435 5,019 = Net Oper. Profit After Tax 2,188 2,172 2,215 2,312 2,252 Total Invested Capital N/A 1,913 2,153 2,653 2,344 Total Invested Capital N/A 1, ,366 2,214 = Free Cash Flow N/A 2,296 2,483 2,782 2,675 = Free Cash Flow N/A 720 1, NOPAT per Share $3.69 $4.45 $5.00 $6.06 $5.79 NOPAT per Share $2.02 $2.09 $2.17 $2.31 $2.29 Free Cash Flow per Share N/A $2.43 $2.68 $3.10 $3.09 Free Cash Flow per Share N/A.69 $ Net Operating Profit After Tax Free Cash Flow Net Operating Profit After Tax Free Cash Flow $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 NOPAT per Share UNP CSX $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $2,500 $2,000 $1,500 $1,000 $ Analyst Comments: Net Property, Plant & Equipment: Net Property Plant and Equipment is the value of all buildings, land, furniture, and other physical capital that a business has purchased to run its business. UNP has steadily invested more in PPE each year, increasing from $39.5 billion in 2011 to $48 billion in Net PPE makes up a substantial portion of UNP s total invested capital. Our conclusion is that UNP is investing in assets for the future. (See notes at bottom) Net Operating Profit After Tax and Free Cash Flow: NOPAT is simply after tax EBIT. NOPAT is used by analysts and investors as a precise and accurate measurement of profitability to compare a company's financial results across its history and against competitors. UNP s NOPAT has increased from 2011 to 2015, from $3.5 billion to $5 billion. Along with NOPAT increasing, UNP s free cash flow has increased from $2.2 billion in 2012 to $2.6 billion in Note that both NOPAT and Free cash flow has seen a slight decline in 2015 from their previous 2014 high. Just to reiterate Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Due to the 2015 decline we had an inconclusive outlook but felt as though the past data indicated positive operating income efficiencies (note operating efficiency margin). See also that EBIT, NOPAT, Total Capital and # of shares all declined, resulting in constant FCF per share. UNP has been investing in the following: Rail and other track material $ 734(Million), Ties 455(Million) Ballast 438(Million), Total road infrastructure replacements (Billion), line expansion and other capacity projects 457(Million), commercial facilities 227(Million), total capacity and commercial facilities 684(Million), Locomotive and freight cars 1436, 3. Value Creation and DCF Model UNP, Page 7 of 17 Copyright Robert A. Weigand, Ph.D., 2016

8 UNP CSX CSX Corp. Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted % Equity Capitalization $67, % % Equity Capitalization $25, % 9.531% 6.731% + Total Debt $13, % % + Total Debt $10, % % + Preferred Stock Preferred Stock = Value of All Securities $81, = Value of All Securities $36, Effective Tax Rate 37.67% Alternative RF Rate: Effective Tax Rate 37.28% Alternative RF Rate: Risk Free Rate Risk Free Rate Beta (5 Yr) Alternative Beta: Beta (5 Yr) Alternative Beta: Market Risk Premium Market Risk Premium CAPM Cost of Equity 9.65 CAPM Cost of Equity 9.531% Weighted Average Cost of Capital: 8.557% Weighted Average Cost of Capital: 7.652% 8.557% 8.557% 8.557% 8.557% 8.557% UNP CSX CSX Corp. ROIC, EVA and MVA ROIC, EVA and MVA Return on Invested Capital 8.7% 9.8% 10.3% 11.4% 10. Return on Invested Capital % 7.9% 7.1% Economic Value Added , Economic Value Added Market Valued Added 32,877 39,601 56,601 85,683 47,035 Market Valued Added 14,353 11,046 18,345 25,565 14,034 EVA per Share $ EVA per Share (.17) MVA per Share $33.85 $41.85 $61.09 $95.51 $54.30 MVA per Share $13.25 $10.64 $18.00 $25.54 $ ,600 1,400 1,200 1, Economic Value-Added Market Valued-Added 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 $2.00 $1.50 $ EVA per Share UNP CSX Economic Value-Added Market Valued-Added 30,000 25,000 20,000 15,000 10,000 5, Return on Invested Capital Return on Equity Return on Invested Capital UNP CSX Return on Invested Capital Return on Equity Analyst Comments: WACC (Weighted Average Cost of Capital)*: The WACC measures each investor's expected return in proportion to their contribution to financing the firm's assets. We have increased UNP s beta to coincide with the Argus predicted beta, but did not alter CSX s beta. We have updated both firms RF rate to 1.74 to coincide with 02/23/ yr. treasury note (as stated by the U.S. Department of the Treasury). All else equal, an investor now receives slightly less value per capital investment made by UNP. That means for every dollar that UNP invests into capital, UNP is creating.1 less value. Return on Invested Capital: ROIC is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. UNP s ROIC has overall increased in this 5 year period. ROIC increased from 8.7% in 2011 to 11.4% in 2014, and has had a slight contraction in 2015, to 1. Note that UNP s WACC is at 8.557%, which is positive indication, since it is below ROIC. When we compare it to CSX you will notice that their ROIC is paltry in comparison with UNP, and only when we match beta s does CSX generate a ROIC greater than their WACC. However, in both scenarios we see in 2015 a ROIC below the WACC, meaning they are destroying value. In regards to this model UNP has excelled at earning a higher ROIC with a cost of capital 3. Value Creation and DCF Model UNP, Page 8 of 17 Copyright Robert A. Weigand, Ph.D., 2016

9 Long Term Growth Rate: Long Term Growth Rate: UNP 1. CSX CSX Corp. Intrinsic Value Model Intrinsic Value Model PV of Future FCFs 34,064 34,682 35,167 35,395 35,749 PV of Future FCFs 3,111 2,628 1, Value of Non Oper. Assets 1,217 1,063 1,432 1,586 1,391 + Value of Non Oper. Assets 1,306 1,371 1, ,438 = Total Intrinsic Firm Value 35,281 35,745 36,599 36,981 37,140 = Total Intrinsic Firm Value 4,417 3,999 2,420 1,459 1,936 Total Debt 8,697 8,801 8,872 10,952 13,607 Total Debt 8,734 9,052 9,022 9,514 10,683 = Intrinsic Value of Equity 26,584 26,944 27,727 26,029 23,533 = Intrinsic Value of Equity 4,317 5,053 6,602 8,055 8,747 Total Weighted Shares Total Weighted Shares 1,083 1,038 1,019 1, = Per Share Intrinsic Value $27.37 $28.48 $29.93 $29.01 $27.17 = Per Share Intrinsic Value $3.99 $4.87 $6.48 $8.05 $8.90 vs. Year End Stock Price $52.97 $62.86 $84.00 $ $78.20 vs. Year End Stock Price $21.06 $19.43 $28.29 $36.68 $26.13 Over (Under) Valuation/Share $25.60 $34.38 $54.07 $90.12 $51.03 Over (Under) Valuation/Share $25.05 $24.30 $34.77 $44.73 $35.03 % Over (Under) Valued 93.6% 120.7% 180.7% 310.6% 187.8% % Over (Under) Valued 628.3% 499.2% 536.7% 555.8% 393.6% $140 $120 $100 $80 $60 Year-End Stock Price Per Share Intrinsic Value $120 $100 $80 $60 MVA per Share UNP CSX $30 $10 $10 Year-End Stock Price Per Share Intrinsic Value $100 $80 $60 $ Over (Under) Valued % Over (Under) Valued % 1 8% 6% 4% 2% Return on Invested Capital WACC $50 $30 $10 $ Over (Under) Valued % Over (Under) Valued Analyst Comments:Economic Value Added Market Value added: EVA is a year by year measure of how much economic profit the firm has created. UNP has been able to increase their economic profit over this 5 year period from 63 to 727. From 2013 to 2014 UNP s EVA jumped from 771 to 1,343, before dropping to the 727 in UNP has increased its economic profit (EVA) every year since While CSX has seen a negative EVA. From our model we can conclude that UNP is a far more economically profitable company when compared to CSX. MVA is measured as the market value of all the firm's securities minus the book value of all the firm's securities and therefore is a basic measure of value creation. As was the case with many of the value creation metrics, UNP posts significantly higher MVA/shares than CSX in every year. Please refer to the note for value creation. MVA moves in line with EVA however, according to our model it is consistenly overvalued. In conclusion the market has overvalued UNPs stock from To demonstrate value creation please refer to the following equation. (Equity Market cap Total Equity on Balance Sheet) $ = $47.035(billion). Meaning that UNP has increased the value of the.702 of capital contributed to the firm by shareholders by $ billion. This is genuine value creation 3. Value Creation and DCF Model UNP, Page 9 of 17 Copyright Robert A. Weigand, Ph.D., 2016

10 UNP CSX CSX Corp. Piotroski Financial Fitness Scorecard Piotroski Financial Fitness Scorecard Positive Net Income Positive Net Income Positive Free Cash Flow Positive Free Cash Flow Growing ROA (% change NI > % change TA) Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) Increasing Liquidity (Current Ratio) % Change Shares Outstanding < % Change Shares Outstanding (Diluted) < Expanding Operating Margin Expanding Operating Margin Asset Turnover (% change sales > % change assets) Asset Turnover (% change sales > % change assets) Total Liabilities to Operating Cash Flow (EBIT) < Total Liabilities to Operating Cash Flow (EBIT) < Piotroski Score (max = 10) Piotroski Score (max = 10) UNP CSX CSX Corp. Altman Probability of Bankruptcy Z Score Altman Probability of Bankruptcy Z Score (Current Assets Current Liabilities)/Total Assets ## (Current Assets Current Liabilities)/Total Assets Retained Earnings/Total Assets ## Retained Earnings/Total Assets Earnings Before Interest & Tax/Total Assets ## Earnings Before Interest & Tax/Total Assets Market Value Equity/Total Liabilities ## Market Value Equity/Total Liabilities Sales/Total Assets ## Sales/Total Assets Altman Score Altman Score Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < Value Creation and DCF Model UNP, Page 10 of 17 Copyright Robert A. Weigand, Ph.D., 2016

11 31 Dec Dec Dec Dec Dec 15 UNP Industrials Report Date: April 18, 2016 Historical Income Statement Drivers Average Forecasted Income Statement Drivers E 2017E 2018E 2019E 2020E Total Revenue 19,557 20,926 21,963 23,988 21,813 Total Revenue 20,504 19,889 19,889 20,088 20,490 % growth N/A % 9.1% 2.8% % growth Gross Profit 8,123 9,293 10,072 11,581 10,988 Gross Profit 10,355 10,143 10,243 10,446 10,757 Gross Margin (% of sales) % 45.9% 48.3% 50.4% 46.1% Gross Margin (% of sales) Operating Income (EBIT) 5,724 6,745 7,446 8,753 8,052 Operating Income (EBIT) 7,587 7,458 7,558 7,734 7,991 Operating Margin (% of sales) 29.3% 32.2% 33.9% % 33.8% Operating Margin (% of sales) Earnings Before Tax 5,264 6,318 7,048 8,343 7,656 Income Tax Expense 1,972 2,375 2,660 3,163 2,884 Forecasted Effective Tax Rate 37.7% 37.7% 37.7% 37.7% 37.7% Effective Tax Rate % 37.7% 37.9% 37.7% 37.7% Effective Tax Rate Adjustment 37.7% 37.7% 37.7% 37.7% 37.7% Net Income 3,292 3,943 4,388 5,180 4,772 Net Income 4,511 4,435 4,495 4,600 4,754 Net Margin (% of sales) 16.8% 18.8% % 21.9% 19.8% Net Margin (% of sales) % 22.6% 22.9% 23.2% Total Common Shares Total Common Shares % growth N/A 2.6% 2.1% 3.2% 3.4% 2.8% % growth Earnings per Share $3.39 $4.17 $4.74 $5.77 $5.51 Earnings per Share $5.37 $5.44 $5.69 $6.00 $6.39 Dividends per Share.97 $1.25 $1.48 $1.91 $2.20 Dividends per Share $2.34 $2.46 $2.56 $2.64 $2.69 % growth N/A % 29.1% 15.2% 22.9% % growth Year end Stock Price $ $ $ $ $ Historical Balance Sheet Drivers Forecasted Balance Sheet Drivers 2016E 2017E 2018E 2019E 2020E Cash + ST Investments 1,217 1,063 1,432 1,586 1,391 Cash + ST Investments 1,312 1,273 1,253 1,266 1,270 % of sales 6.2% 5.1% % 6.4% 6.2% % of sales 6.4% 6.4% 6.3% 6.3% 6.2% Total Receivables 1,401 1,331 1,414 1,611 1,356 Total Receivables 1,271 1,233 1,213 1,225 1,229 % of sales 7.2% 6.4% 6.4% 6.7% 6.2% 6.6% % of sales 6.2% 6.2% 6.1% 6.1% 6. Inventory Inventory % of sales 3.1% 3.2% % 3.1% % of sales 3.4% 3.3% 3.2% 3.1% 3. Net PPE 39,583 41,637 43,324 45,720 48,305 Net PPE 48,185 48,132 48,132 48,211 48,151 % of sales 202.4% % 190.6% % % of sales Total Assets 45,096 47,153 49,731 52,372 54,600 Total Assets 54,336 54,695 54,695 54,238 54,298 % of sales 230.6% 225.3% 226.4% 218.3% 250.3% 230.2% % of sales Payables and Accruals 1,718 1,681 1,660 1,813 1,628 Payables and Accruals 1,538 1,472 1,452 1,446 1,455 % of sales 8.8% % 7.6% % % of sales % 7.3% 7.2% 7.1% ST Debt plus LT Debt 8,697 8,801 8,872 10,952 13,607 ST Debt plus LT Debt 13,943 13,326 13,127 13,057 13,113 % of sales % 40.4% 45.7% 62.4% 47. % of sales Total Equity 18,578 19,877 21,225 21,189 20,702 Total Equity 19,479 18,895 18,895 19,084 19,465 % of sales % 88.3% 94.9% 94. % of sales $30,000 $25,000,000 $15,000 $10,000 $5,000 Total Revenue Operating Income (EBIT) INCOME STATEMENT: Total Revenue: We expect total revenues to continue decreasing in the near term. Managment expects modest long term growth longer term, however, due to the expectation that the U.S economy will continue to improve at a modest pace, wth some markets outperforming others. This is based on reports from the 10 K, Argus, and Morning star. We remained moderately pessimistic. Gross Profit and Operating Income: We kept an initial modest growth rate, with a. increase per year. We based this off of our historical data up to 2015 and according to the 10 K, In the current environment, we expect continued margin improvement driven by continued pricing opportunities, ongoing productivity initiatives, and the ability to leverage our resources and strengthen our franchise. Tax Rate: We saw no indications for a changing tax rate, therefore we kept it at its historical average. Net Income: Based off of previously stated facts about management, management's goal to increase profit margins we have forecasted netcinome to increase percetage wise by.3% per year for the next 5 years. Total Common Shares: UNP has a buyback program according to the 10 K, however they have not specified the amount that they will buy back in the coming years. so we based it off their historical data. Dividend Per Share: Based off the Argus report, UNP has estimated dividends to be $2.34 for 2016 and $2.50 for however we remained pessimistic and decreased the growth rate to 2017 and we ultimately decreased the long term growth rate down to 2%. BALANCE SHEET: The forecasts we have implemented for the Balance Sheet have been done with a margin of safety based off of the Historical Averages and trends unless stated otherwise. Net PPE and Total Assets: In 2016 we expect an increase in both Net PPE and Total assets because of 3.75 billion being invested. Because management in uncertain of the current economic conditions they may revise their current business plan for investing into 2016E 2017E 2018E 2019E 2020E new assets, therefore to be pessimistic we maintained their current level of assets. 4. Forecasting and Valuation UNP, Page 11 of 17 Copyright Robert A. Weigand, Ph.D., 2016

12 Earnings per Share Dividends per Share Gross Profit Margin Operating Profit Margin Net Profit Margin Effective Tax Rate (right axis) $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $ E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E 38% 38% 38% 38% 38% 38% 37% 37% 37% Historical Performance Forecasted Performance Total Invested Capital Total Invested Capital 2016E 2017E 2018E 2019E 2020E Cash and ST Investments 1,217 1,063 1,432 1,586 1,391 Cash and ST Investments 1,312 1,273 1,253 1,266 1,270 + Receviables 1,401 1,331 1,414 1,611 1,356 + Receviables 1,271 1,233 1,213 1,225 1,229 + Inventory Inventory Payables and Accruals 1,718 1,681 1,660 1,813 1,628 Payables and Accruals 1,538 1,472 1,452 1,446 1,455 = Net Oper. Working Capital 1,514 1,373 1,839 2,096 1,855 = Net Oper. Working Capital 1,743 1,691 1,651 1,667 1,660 + Net Property, Plant & Equip. 39,583 41,637 43,324 45,720 48,305 + Net Property, Plant & Equip. 48,185 48,132 48,132 48,211 48,151 = Total Invested Capital 41,097 43,010 45,163 47,816 50,160 = Total Invested Capital 49,928 49,822 49,782 49,878 49,811 Total Common Shares Total Common Shares = Total Invested Capital/Share $42.31 $45.46 $48.75 $53.30 $57.91 = Total Invested Capital/Share $59.42 $61.13 $62.97 $65.04 $66.96 $60,000 Total Invested Capital Net Fixed Assets $60,000 Total Invested Capital Net Operating Working Capital $6,000 NOPAT Free Cash Flow $50,000 $50,000 $5,000,000,000 $4,000 $30,000 $30,000 $3,000,000,000 $2,000 $10,000 $10,000 $1, E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E Historical Performance Forecasted Performance NOPAT and Free Cash Flow NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E Operating Income (EBIT) 5,724 6,745 7,446 8,753 8,052 Operating Income (EBIT) 7,587 7,458 7,558 7,734 7,991 (1 Effective Tax Rate) % 37.7% 37.9% 37.7% (1 Effective Tax Rate) 37.7% 37.7% 37.7% 37.7% 37.7% = Net Oper. Profit After Tax 3,580 4,209 4,636 5,435 5,019 = Net Oper. Profit After Tax 4,726 4,647 4,709 4,818 4,978 Total Invested Capital N/A 1,913 2,153 2,653 2,344 Total Invested Capital (232) (106) (40) 96 (68) = Free Cash Flow N/A 2,296 2,483 2,782 2,675 = Free Cash Flow 4,959 4,752 4,748 4,722 5,046 NOPAT per Share $3.69 $4.45 $5.00 $6.06 $5.79 NOPAT per Share $5.63 $5.70 $5.96 $6.28 $6.69 Free Cash Flow per Share N/A $2.43 $2.68 $3.10 $3.09 Free Cash Flow per Share $5.90 $5.83 $6.01 $6.16 $6.78 Analyst Comments: Total Invested Capital: In 2016 we projected that UNP will continue to grow their total invested capital. From 2017 to 2020, our model predicted that total invested capital will remain constant. We concluded this by the comments from managment in the 10 K citing that they would revise their business plans if economic conditions continue to be uncertain. NOPAT: Revenues decreased, while our margins increased causing NOPAT saw a decrease from , then begin to bounce back from Which indictaes from UNP will see an increase in bottom line profits. Free Cash Flow: If management does decide not to invest into assets and total invested capital then free cash flow will remained relatively high, as UNP is no longer increasing their rate of investing. We cant speculate on how UNP will spend this excess amount of cash flows, managment will have a decision to make on how to allocate their cash in the future years. 4. Forecasting and Valuation UNP, Page 12 of 17 Copyright Robert A. Weigand, Ph.D., 2016

13 Cost of Capital 2015 Weight % Cost Weighted % Dividend Discount Valuation Model Equity Capitalization $67, % % + Total Debt $13, % % Year 2016E 2017E 2018E 2019E 2020E = Value of All Securities $81, Dividend Growth Rates Expected Future Dividends $2.34 $2.46 $2.56 $2.64 $2.69 Effective Tax Rate 37.7 Alternative RF Rate: Risk Free Rate PV Dividends 1 4 $7.95 Dividend Yield 3. Beta (5 Yr) Alternative Beta: PV Perpetual Div. $24.31 Market Risk Premium Intrinsic Value $32.25 If Purchased For: $77.20 CAPM Cost of Equity 9.65 Current Price $77.20 Expected Return = 13.4% Weighted Average Cost of Capital: 8.557% 8.557% 8.557% 8.557% 8.557% 8.557% ($77.20) $ % $ % $ % $ % $ % Historical Performance Forecasted Performance ROIC, EVA and MVA ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E Return on Invested Capital 8.7% 9.8% 10.3% 11.4% 10. Return on Invested Capital % % 10. Economic Value Added , Economic Value Added Market Valued Added 32,877 39,601 56,601 85,683 47,035 Market Valued Added 45,386 42,741 44,477 46,087 47,193 EVA per Share $ EVA per Share MVA per Share $33.85 $41.85 $61.09 $95.51 $54.30 MVA per Share $54.02 $52.44 $56.26 $60.10 $63.45 $8 $7 $6 $5 $4 $3 $2 $1 NOPAT per Share Free Cash Flow per Share 2016E 2017E 2018E 2019E 2020E 1,600 1,400 1,200 1, EVA MVA (right axis) 2016E 2017E 2018E 2019E 2020E 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 $1.6 $1.4 $1.2 $ EVA per Share MVA per Share (right axis) $120 $100 $80 $ E 2017E 2018E 2019E 2020E Perpetual Growth Rate: 2. Historical Performance Forecasted Performance DCF Intrinsic Value Model DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E PV of Future FCFs 59,541 62,339 65,191 67,987 71,130 PV of Future FCFs 72,258 73,689 75,246 76,962 78,501 + Cash and ST Investments 1,217 1,063 1,432 1,586 1,391 + Cash and ST Investments 1,312 1,273 1,253 1,266 1,270 = Total Intrinsic Firm Value 60,758 63,402 66,623 69,573 72,521 = Total Intrinsic Firm Value 73,570 74,962 76,499 78,228 79,772 Total Debt 8,697 8,801 8,872 10,952 13,607 Total Debt 13,943 13,326 13,127 13,057 13,113 = Intrinsic Value of Equity 52,061 54,601 57,751 58,621 58,914 = Intrinsic Value of Equity 59,627 61,636 63,372 65,171 66,658 Total Common Shares Total Common Shares = Per Share Intrinsic Value $53.59 $57.71 $62.33 $65.35 $68.01 = Per Share Intrinsic Value $70.97 $75.63 $80.16 $84.99 $89.61 vs. Year End Stock Price $52.97 $62.86 $84.00 $ $78.20 vs. Most Recent Stock Price $77.20 Over (Under) Valuation/Share (.62) $5.15 $21.67 $53.78 $10.19 Over (Under) Valuation/Share $6.23 % Over (Under) Valued 1.2% 8.9% 34.8% 82.3% 15. % Over (Under) Valued 8.8% Analyst Comments: EVA: We projected that EVA will continue to decline through 2017, slightly increasing in We forecasted that there would be a modest increase in 2019 and We have forecasted that UNP will increase their value from ROIC and WACC: We see a slight decline in ROIC for 2016, from 2017 to 2020, ROIC grows at a sluggish rate. Even with the two negative years following 2015, ROIC remains above WACC. This would indicate that we are still projected to earn a positive return on capital. 4. Forecasting and Valuation UNP, Page 13 of 17 Copyright Robert A. Weigand, Ph.D., 2016

14 ROIC WACC Year-End Stock Price Per Share Intrinsic Value $ Over (Under) Valued % Over (Under) Valued 12% 1 8% 6% 4% 2% 2016E 2017E 2018E 2019E 2020E $140 $120 $100 $80 $ E 2017E 2018E 2019E 2020E $60 $50 $30 $10 $ E Historical Performance Forecasted Performance Relative Valuation Relative Valuation 2016E 2017E 2018E 2019E 2020E Price to Earnings Price to Earnings Price to Free Cash Flow N/A Price to Free Cash Flow Price to Sales Price to Sales Price to Book Price to Book Earnings Yield 6.4% 6.6% 5.6% 4.8% 7. Earnings Yield % 7.1% 7.1% 7.1% Dividend Yield 1.8% % 1.6% 2.8% Dividend Yield % 3.2% 3.1% 3. Price to Earnings Price to Free Cash Flow Price to Sales Price to Book (right axis) Earnings Yield Dividend Yield E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E E 2017E 2018E 2019E 2020E Analyst Comments: Price to Earnings: UNP's projected P/E drops off significantly from After this decline we expect the P/E ratio to remain relatively flat. It is important to note that UNP's projected P/E ratio remains within the reasonable range of Dividend Yield: We projected that dividends will increase in 2016 according to argus, then slowly taper back down. We believe that as UNP's revenue increase in the future, that they will decelerate the rate in which they increase dividends. With the increase in dividend yield this is a good sign for dividend seeking investors. Earning Yield: We have projected that earnings yield will remanin fairly constant based on the 2015 year end. UNPs earning yield stayed consitent therefore indicating the market is pricing their stock more cheaply relative to their earnings. 4. Forecasting and Valuation UNP, Page 14 of 17 Copyright Robert A. Weigand, Ph.D., 2016