Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Union Pacific: Rolling Along and Crushing the Competition

If you see an industry leader that is clearly dominating its peers, it usually makes sense to consider buying the stock. In the railroad industry there are three big publicly traded competitors: CSX (NASDAQ: CSX  ) , Norfolk Southern (NYSE: NSC  ) , and Union Pacific (NYSE: UNP  ) . Among these three, Union Pacific is the dominant franchise. The company doesn't just beat its peers on one or two measures, it rolls over them like a runaway train.

A uniquely valuable industry
Buying a stock means that you get a small ownership interest in the company. You can do your homework and keep up with how the company is doing, but few stocks give you a full economic report like a railroad stock.

Each of the major railroads reports its operations slightly differently. Norfolk Southern lumps multiple categories of shipments under the heading "general merchandise", while CSX and Union Pacific are more specific about chemicals, industrial products, automotive, and additional industries. In short, investors get a multiple industry update every three months when these companies report earnings.

The second unique characteristic of railroad stocks is that there might not be a bigger moat in any other industry. Trucking and other forms of transportation might compete against the railroads, but shipping products by rail is arguably more cost effective. In addition, it's not like someone can come along and install thousands of miles of railroad track and set up a competing railway overnight. With a huge moat, and detailed information on multiple industries, each of the railroads could represent an opportunity, but what makes Union Pacific different?

Bucking the trend and setting the standard
One of Union Pacific's most important accomplishments in the last several years has been the company's ability to deal with depressed coal prices. Last quarter was no different with Union Pacific as the only one of the big three railroads to report positive revenue growth in coal shipments.

Prior to reporting earnings, Union Pacific warned that coal could be a culprit in its third quarter results being a few cents lower than expected . Though some might point to Union Pacific reporting earnings that missed estimates by $0.02, keep in mind this is a company that beat expectations by a combined $0.14 over the last four quarters. If you look at Union Pacific's results relative to its peers, the numbers speak for themselves.

With CSX and Norfolk Southern reporting coal revenues down 7 % and 9% respectively, reporting growth in coal revenues is an impressive feat by Union Pacific. It should come as no surprise that Union Pacific's superior performance in the weak coal segment also allowed the railroad to report an operating margin higher than either of its competitors as well. All things being equal, a company with a higher operating margin is more insulated from pricing challenges and weaker demand.

With an operating margin of over 35%, Union Pacific isn't just outperforming the competition, it's crushing them. Both CSX and Norfolk Southern reported margins of 30% or less. This may not sound like a huge difference, but with Union Pacific posting over $5 billion in sales each quarter, this 3% higher operating margin means millions more in profits.

Connecting the dots
Union Pacific's better coal performance and a better operating margin are two important factors in the company's better cash flow. Many investors use cash flow growth as a key factor in deciding what stocks to purchase. Since earnings can be manipulated, cash flow is a more pure measure of what a company can return to shareholders.

When comparing companies, using core operating cash flow helps to strip away some of the accounting line items that aren't real cash expenditures. Core operating cash flow is simply net income plus depreciation. By this metric, Union Pacific again comes out on top of its peers.

From the third quarter of 2012 to the third quarter of 2013, Union Pacific increased operating cash flow by nearly 8%. By comparison, CSX managed less than half this increase and Norfolk Southern performed even worse.

In addition, Union Pacific's better operating cash flow gives investors a better dividend payout ratio as well. As in other cases, the difference between Union Pacific's core free cash flow payout ratio of 51%, and its peers' ratios of more than 75% isn't insignificant.

As you can see, from better margins, to better cash flow, Union Pacific is beating up on the competition. The company's lower payout ratio could also mean bigger dividend increases as well. When you connect the dots, buying Union Pacific could put investors on the right track for superior returns.

One home-run investing opportunity has been slipping under Wall Street's radar 
But it won't stay hidden much longer. Forward-thinking energy players like GE and Ford have already plowed sizable amounts of research capital into this little-known stock... because they know it holds the key to the explosive profit power of the coming "no choice fuel revolution." Luckily, there's still time for you to get on board if you act quickly. All the details are inside an exclusive report from The Motley Fool. Click here for the full story!

Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2700481, ~/Articles/ArticleHandler.aspx, 9/26/2016 11:58:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,119.58 -141.87 -0.78%
S&P 500 2,150.46 -14.23 -0.66%
NASD 5,266.11 -39.64 -0.75%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 11:42 AM
CSX $29.82 Up +0.18 +0.61%
CSX CAPS Rating: *****
NSC $93.89 Up +0.27 +0.29%
Norfolk Southern CAPS Rating: *****
UNP $94.29 Down -0.04 -0.04%
Union Pacific CAPS Rating: *****