On Monday, Jefferies initiated coverage on Union Pacific Corporation (NYSE:UNP) stock, issuing a Hold rating and setting a price target of $250. The analyst from Jefferies highlighted Union Pacific as the largest publicly traded Class 1 railroad in North America, which alternates with BNSF Railway as the largest Class 1 railroad overall based on volume or revenue.
Union Pacific is recognized as a high-quality operator within the industry, with a competitive edge over its West Coast rival, BNSF, due to a superior margin profile that exceeds by over 500 basis points. The company's significant size, relatively low capital intensity, and margins above those of its peers have historically enabled it to return the most cash to shareholders through dividends and share repurchases.
Despite Union Pacific's leading industry margin, the analyst expressed skepticism regarding the company's ability to expand its operating ratio (OR) margin further over the next five years. The current OR for 2023 stands at 62%, and the analyst suggests that Union Pacific is nearing a sustainable OR floor of 55%-60%.
The report also pointed out that with Union Pacific's stock trading at the higher end of its historical range and having already factored in volume growth and a 10% earnings per share compound annual growth rate over the next two years, the shares appear to be fully valued. This assessment leads to the belief that there is a risk of multiple contraction moving towards its long-term average as the potential for margin improvement becomes fully recognized.
InvestingPro Insights
Union Pacific Corporation (NYSE:UNP) stands out with a solid financial profile as evidenced by key metrics from InvestingPro. The company boasts a substantial market capitalization of $147.65 billion, which underscores its significant presence in the industry. Additionally, Union Pacific maintains impressive gross profit margins, with the last twelve months as of Q4 2023 showing a strong 53.48%. This aligns with the analyst's note on the company's superior margin profile and its history of returning cash to shareholders.
InvestingPro Tips highlight Union Pacific's consistency in rewarding investors, having raised its dividend for 17 consecutive years and maintaining dividend payments for 54 consecutive years. This track record of dividend growth and stability is a testament to the company's financial health and commitment to shareholder value. However, it's worth noting that the company is trading at a high revenue valuation multiple and a high Price / Book multiple of 9.98 as of the last twelve months ending Q4 2023, which may reflect in the analyst's concern about the stock being fully valued.
For investors seeking more detailed analysis and additional insights, there are 11 more InvestingPro Tips available for Union Pacific on InvestingPro. To access these insights and enhance your investment strategy, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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