Bloomsburg Investment Group Equity Analysis Union Pacific Corporation (UNP)

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1 Bloomsburg Investment Group Opinion: Bloomsburg Investment Group Equity Analysis oration () Analyst: Keegan Carl & Michael Mintzer, Class of 2018 Samuel Stellwagon Class of 2020 We believe that oration is a strong hold. is in an attractive sector with an even more attractive operating and political environment. While there are certainly threats to the company's success, including strong competition, pipeline expansion, and political threats, there is much more upside to holding the company. Their free cash flow and retained earnings continue to grow, enabling them to continue dividend payments. We feel that is going to be a cash flow machine for the forseeable future, and that is represented in the valuations we arrived at. Corporate Summary: Union Pacific operates railroads throughout the United States. It offers services for agricultural products, commodities, food and beverage products, automotive products, chemicals, coal, industrial products (such as lumber, minerals, metals, etc.) and container traffic. Currently, has 32,070 miles across the United States, ranging from the middle of the country to the west coast. The company is currently headquartered in Omaha, Nebraska, and has been in operation since Corporate Details: Name Ticker Domicile Sector Industry Exchange Last Close Price 52 Wk High Price 52 Wk Low Latest Dividend Dividend Yield % TTM Beta 5 Yr (Mo End) Avg Daily Volume (3 Mo) Shares Outstanding (mil) Number of Analysts United States Industrials Railroads NEW YORK STOCK EXCHANGE, INC ,740, Page 1 of 7

2 Financial Summary, Year End 2016 (in millions) Market Capitaliza on 86, Total Revenue 19, Gross Profit 15, Opera ng Income 7, Net Income Cont Ops 4, Net Income 4, Current Assets 3, Cash 1, Total Assets 55, Current Liabili es 3, Long term Liabili es 32, Total Liabili es 35, Total Equity 19, Opera ng Cash Flow 7, Inves ng Cash Flow 3, Financing Cash Flow 4, Change In Cash EBITDA 9, Enterprise Value 100, Capital Expenditure 3, P/E Ra o Forward PEG Ra o 2.41 Dividend Yield % TTM 2.16 Financial Highlights - The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. As a result of larger capital spending, depreciable asset base increased, and therefore depreciation expense increase in 2016 form This increase was partially offset by our recent depreciation studies that resulted in lower depreciation rates for some asset classes. - issued a significant amount of debt in because the cost of debt is very cheap to acquire. - also back a lot of already issued common stock. This could be a result of free cash flows. Investment Growth Time Period: 4/1/2014 to 3/31/ % 30.0% 22.5% 15.0% 7.5% 0.0% -7.5% -15.0% -22.5% -30.0% 6/2014 9/ /2014 3/2015 6/2015 9/ /2015 3/2016 6/2016 9/ /2016 3/ % S&P 500 TR USD 34.4% Page 2 of 7

3 is Safest US Railroad for 2nd Year in a Row Receives Over 800 Violations for Defects improved safety improved by 11%, with the reportable injury falling 10 basis points to.78. The rate is measured by a per 200,000 employee hours worked. This shows great care towards employees, and is a sign of strong retention possibility for the employees. Of the 24,000 defects found, was the worst offender with over 800. Most of the defects were found in the Southwest, where most of the trains are oil. While specifics have not been identified, they typically include worn rails, broken bolts, and steel bars that have been cracked. Spends $180 million to Improve CA Infrastructure Train Derails in IA; Causes Fire has announced additional spending in California. Of the $180 million, $150 million is for track maintenance and $20 million is for bridge projects. The goals of the investment is to continue to decrease injuries and to increase travel speed while minimzing delays. A train operated by derailed in northwest Iowa while carrying ethanol. It caused a fire that lasted approximately 15 hours. Fortunately, there was no ethanol leaked into the nearby creek. No injuries occurred, and 74 of the 101 cars were able to be detached and removed. 4/9/2017 Union Pacific Corp Page 3 of 7

4 Industry Environment: The rail transport environment is very competitive. 's largest competitor is CSX, who has a stronghold on east coast rails. As a whole, the Trump administration is expected to strengthen the rail industry. Infrastructure spending is expecting to increase, and it is evident that the market is pricing that in based on the recent climb since the election. We expect that the earnings and performance of the industry as a whole will be up once President Trump's policies are implemented in full. Until then, the major threats are pipeline growth (which hurts as a transporter of crude) and accidents/ injuries which may lead to lawsuits. Competitor Comparison CSX Corp Norfolk Southern Corp Canadian National Railway Co Investment Growth Time Period: 4/1/2012 to 3/31/ % 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Revenue (mil) Competitor Comparison (Cont.) CSX Corp Norfolk Southern Corp Canadian National Railway Co Revenue % Chg Gross Profit (mil) Gross Margin % Net Net Income Income % (mil) Chg Net Margin % Market Cap (mil) (Daily) Current Receivable Ratio Turnover 19, , , , , , , , , , , , , , , , Asset Turnover ROA % Total Debt to Total Equity ROE % Beta 5 Yr P/E Ratio Forward PEG Ratio P/B Ratio Current Dividend Yield % TTM Free Cash Flow / Sales % TTM % 9/2012 3/2013 9/2013 3/2014 9/2014 3/2015 9/2015 3/2016 9/2016 3/ % CSX Corp 142.9% Norfolk Southern Corp 93.7% Canadian National Railway Co 101.5% Page 4 of 7

5 Strengths: - Pro Infrastructure Environment: We believe that President Trump's policies, which include drilling in the US for crude oil and increased infrastructure spending, will allow to grow operation and expand. - On-Job Safety: is a pro-employee company, as evidenced by the care they take in order to ensure that employees are not hurt on the job. This strengthens employee motivation which turns into better production on the job. - Financials: Strong balance sheet, current ratio of 1 to ensure maximum profitability while still being able to meet obligations, strong levered free cash flow to allow payment of dividends while still increasing retained earnings (CF is so high due to non-cash expense of depreciation) Weaknesses: - Pipeline Expansion: threat of pipeline growth may take away demand for transportation of crude oil, taking away revenue. - Old Rails: has been cited numerous time for faulty rail systems primarily due to age. New investment is necessary to maintain safe operation and efficiency. - Profitability Ratios: PR's have been decreasing over the last year. This is in part due to lower crude oil prices, which led to a decline in transports. We are however expecting them to increase this coming year as usage rates are expected to increase. - Lack of Exposure to East Cost: has no rails on the east coast, so they are missing out on a whole segment of the country. Opportunities: - Coal Industry: With a Trump presidency, the coal industry could receive a boost and that will help Union Pacific railroads. - Manufacturing: A possible increase in manufacturing will help Union Pacific load more cars with lumber, metals, and construction products. - Growth: The Company as a whole is growing and that leads possible acquisitions in the future. - Production: Being the largest company in the rail industry, an increase in domestic production will boast well for Union Pacific. - Tax Rate: pays a very high corporate tax rate. The expected tax cuts will significantly increase profits should they be implemented. Threats: - Weather: A drought could decrease the amount of cargo they could transport due to the fact that agricultural products are Union Pacific s highest source of revenue - Politics: An unstable political environment could lead to a decrease shipments in Chemicals (includes crude oil) and intermodal products because they could be imported from foreign countries. The units inside an intermodal cart come 46% from foreign countries and 54% domestic. - Workers: 37% of their operating expenses come from compensation and benefits, and unhappy labor could result in strikes or a demand for increase pay. The rise of minimum wage laws could also harm the company Page 5 of 7

6 Valuation: Discount Cash Flow Model (DCF) Using the DCF model, we got an intrinsic value of $ We believe this is a fair value, since we are projecting strong short-term growth in operating income and dividends. Furthermore, we believe that A&D expenses are going to continue to grow at a steady rate. We had conservative projections long-term to reflect the cyclicality nature of the rail industry. This valuation gives a 14.95% upside. Valuation: Discount Dividend Model (DDM) Our DDM model had an output of -$ We believe this is due to the low discount rate, which is because we chose to use the cost of equity rather than WACC. Valuation: Multiple Valuation We arrived at a value of $ using a multiple valuation where we divided the EPS by the expected dividend per share growth. We feel that this is a very fair value, and gives an 18.89% upside. Page 6 of 7

7 Bloomsburg Investment Group Disclaimer This report was developed by student members of the Bloomsburg Investment Group (BIG). The purpose of the report is to provide research analysis of securi es to poten al and exis ng donors of The BIG Fund. The report is designed to exemplify the abili es of our members through investment research and analysis. Analysts of the Bloomsburg Investment Group and The BIG Fund are not registered brokers, investment advisors, or licensed financial professionals. The generated opinion of our analysts is not an offer or solicita on to buy or sell any security, and due diligence is recommended before making any financial transac on. Informa on included in this report was compiled from different public sources. Not all relevant data was included into the report, and accuracy is not guaranteed. Students, faculty, and staff of Bloomsburg University may have a financial interest in any company listed in this report. Sources Cited Capital IQ Morningstar Direct Marketwatch Yahoo! Finance WSJ CNBC Union Pacific Railway Track & Structures DBRS Page 7 of 7