Efficiency and Steady Expansion Reflected in Union Pacific's Business Strategy
Union Pacific (NYSE: UNP) is still a solid bet, boasting a robust operational base and healthy profitability, despite the industry heading towards the brakes. The company anticipates revenue growth of 4-6% annually and forecasts EBIT to surge from the current $9.765 million to $12.340 million by 2029. Based on a WACC of 7.7% and a P/E multiplier of 20x, this projections translate to a fair price of $251, signaling an upside of about 11% compared to current prices. Yes, the company carries a considerable debt burden (Debt/Equity 3.3x), but its profitability metrics outshine the competition. Despite this, I'm giving it a "Buy" rating.
Company Overview
Union Pacific Corporation commands a significant presence in the railway sector, controlling 32,880 route miles - more than 52,000 kilometers - linking the West and Central United States with Eastern ports, as well as Canada and Mexico. With operations in 23 states, it supplies turnkey logistics to over 10,000 customers, handling goods directly from factories to warehouses.
Union Pacific’s business structure centers around three primary areas: Bulk, Industrial, and Premium. Revenue, which totaled $22.811 billion in 2024, generally followed a 32%-37%-31% split, with Bulk accounting for agricultural, coal, and fertilizer, Industrial encompassing chemicals, plastics, building materials, petroleum products, and Premium dealing with ready-made vehicles and intermodal containers. The company monetizes its services by moving as much freight as possible and as far as possible, charging for every ton-mile.
Union Pacific’s strategy hinges on three key elements: security, service stability, and efficiency. By focusing on longer trains, more powerful locomotives, and improved teamwork, they aim to boost volumes and maintain normal margins and key metrics like a low operating coefficient and high return on invested capital. The company reported an impressive operating ratio of 60.7% in the first quarter of 2025, demonstrating their success in maintaining margin amid a challenging industry climate.
Financial Results
In the first quarter of 2025, Union Pacific barely nudged revenue upward, with the figure remaining at $6.0 billion. However, freight volume improved by 7%, driven primarily by gains in international container shipments and grain. Conversely, coal and oil saw declines, hampering overall revenue growth. Diving deeper into the segments, Premium and Bulk performed well, while Industrial took a small dip, owing mostly to declines in the chemical and energy sectors. The company underscored that revenue growth of 1% was achieved despite lower prices and fuel surcharges.
Management believes the slowdown in revenue growth is primarily a consequence of the weak container market and the overall market environment. With steady prices on their side, they remain optimistic about the future quarters, maintaining their goal for "medium/high single-digit" EPS growth over the next three years, although specific revenue and EPS figures for the entirety of 2025 were not announced. Capital investment and share buyback plans remain unchanged: $3.4 billion for 2025 and $4.0-4.5 billion for share buybacks. The company bought back approximately $1.42 billion worth of shares in the first quarter of 2025.
Debt Levels
Union Pacific’s debt load remains substantial, though manageable, with net debt (excluding cash) totaling about $31.7 billion as of March 31, 2025. This comprises $2.227 million of short-term debt and $30.615 million of long-term debt. The debt-to-equity ratio, at 3.3x, increased from 2023 (3.01x), indicating a rise in borrowed funds, but without excesses. Ensuring an interest coverage of around 8x, which is considered a healthy value for the capital-intensive railway industry, keeps the debt burden under control.
DCF Model
In the model, I anticipate Union Pacific’s revenue growing faster in the coming years, targeting a 4-6% expansion versus the previous 2-3%. With increasing volumes, rising tariffs, and the potential shift of goods from trucks, this growth may be attainable. EBIT is expected to climb from $9.765 million (end of 2025 LTM) to $12.340 million by 2029, representing a growth rate of approximately 4.8% per year. This could be achieved through continued work on efficiency: scale, logistics, technology, and strategic partnerships.
Assuming a CapEx range of 15-18% of revenue, Union Pacific’s CapEx would total $3,561 million in 2025, growing to $4,420 million by 2029, owing to a focus on updating rather than expanding the network. Net working capital is projected to delay part of cash flow—$353 million in 2025 and $245 million in 2029—but these figures fit within a normal turnover structure.
Using a WACC of 7.7% and a P/E multiplier of 20x, the model estimates the fair price of a Union Pacific share at $251, yielding an upside of around 11% compared to current prices. I assign the company a "Buy" rating.
Comparative Analysis
Union Pacific ranks among the six largest rail operators in North America, known as Class I. Geographically, Union Pacific faces stiff competition from BNSF and Canadian Pacific, especially in the West, but the situation becomes denser in the Central US and East, with competitors such as Kansas City Southern (now part of CN), Norfolk Southern, and CSX also vying for market share. Despite this competitive landscape, Union Pacific holds around a third of the freight rail transportation market in the United States and generates roughly equivalent P/E and EV/EBITDA multipliers compared to the sector average. However, its P/B ratio outpaces most of its rivals, reflecting higher profitability.
Balanced Outlook on Risks
Union Pacific operates in an environment with significant risks, ranging from macroeconomics to regulation. An economic slowdown would impact transportation volumes, but the company itself acknowledges that a prolonged recession could negatively affect both producers and consumers of its key cargoes. Geopolitical instability, volatile trade lanes, and increasing insurance prices also pose challenges to the company’s logistics and service. Rising interest rates pose another threat, with Union Pacific carrying a debt burden that would quickly affect FCF and EPS if rates were to climb. The shift from coal and oil to cleaner energy could further reduce the demand for transportation of these goods, adding more pressure on cash flow.
UNP Stock: A Sound Investment Choice
Despite the many challenges and risks that Union Pacific faces, its strong operational excellence, infrastructure investment, strategic partnerships, and shareholder returns make it an appealing investment choice. The company's commitment to operational efficiencies, disciplined capital allocation, and strong shareholder returns positions it as a resilient and efficient competitor within the evolving North American rail industry landscape.
- Union Pacific's financial strategy prioritizes three key elements: security, service stability, and efficiency, which are aimed at enhancing operational efficiencies through longer trains, more powerful locomotives, and improved teamwork.
- The company's insurance costs may rise due to geopolitical instability, volatile trade lanes, and increasing insurance prices, posing a challenge to its logistics and service.
- Union Pacific's business model is centered around technology, with a focus on monetizing its services by moving as much freight as possible and as far as possible, charging for every ton-mile, and investing in updates to the network to improve efficiency.
