Union Pacific: Valuation Looks Attractive

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I am bullish on the stock. (See Insiders’ Hot Stocks on TipRanks)

Railroad Traffic

U.S. Railroad traffic hasn’t quite returned to its normal volume and is currently down marginally year-over-year. The Delta variant and supply chain bottlenecks have been the main issue, but these are all expected to remain temporary given the “staple like” nature of the railroad business, as well as the transitory nature of the issues that have been drying up traffic.

Brandon Oglensk of Barclays (LON:BARC) sees traffic picking back up in 2022, with economic fundamentals still looking strong. The economy is set for a rapid recovery while we’re learning how to live with the virus; both these factors will restore railroad traffic.

Valuation and Momentum

Union Pacific didn’t form part of the pandemic recovery buy, and has lagged the S&P 500 over the past year. This means that a value gap has opened up; Union Pacific regularly outperformed the S&P 500 over the past decade, the company is essential to the economy, and it’s very unlikely that it will ever shed value unless another lockdown has to occur.

The company has a trailing 12-month EPS of $8.80, which analysts expect to grow by an additional 27% by December 2022. If this is to materialize, investors could expect the stock to reach the $275 handle, according to the justified forward P/E ratio.

Dividends

The firm pays out 46.4% of its earnings to shareholders in the form of dividends. There’s plenty of dividend-paying capacity in-store as Union Pacific’s Return on Equity is 13.9% higher than its five-year average, and its cash from operations 3.1% higher.

This is a company with a net income margin 404.9% higher than its industry, with a 10-year CAGR of 7.1%. If railroad traffic increases as anticipated, there’s a perfectly good basis to believe that dividends will continue to be increased as they have been for the past 14 years.

Wall Street’s Take

Wall Street thinks the stock is a Strong Buy with an average price target of $245.05. There have been 17 Buy ratings on the stock, two Holds, and zero sells.

Concluding Thoughts

Union Pacific is a later-stage re-opening play, which isn’t priced in yet. The company will benefit from increased railroad volume, and is valued at a price that exceeds the current market price.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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