Opinions
Bruce Tatters
Union Pacific Corp
UNP-N
COMMENT
Jan 10, 2017
Stock price when the opinion was issued
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They just reported: revenues beat though flat for the year, costs are under control, and they beat earnings. Total volumes were up, including fertilizer up 15%, and industrial chemicals 7%. Their report was better than CSX, though guidance was guarded and mixed, including a muted first half of 2024. It's good to buy now.
UNP is Warren Buffet's 2nd favorite railroad to own (he owns BNSF). It has paid its dividend for 125 consecutive years. It is prudently using some cash reserves to aggressively retire debt and buy back shares. It trades at 9x earnings and supports a ROE of 45%. The dividend is backed by a payout ratio of 50% of cash flow. We recommend setting a stop-loss at $207, looking to achieve $268 -- upside potential over 17%. Yield 2.2%
(Analysts’ price target is $267.82)
North American rail stocks had a pretty difficult 2014-2015. He got more constructive on them early last year. The stocks have had a pretty big recovery over the course of the year. In the transportation arena, rails are very properly valued. In most cases they are at or above the market multiple. Canadian Pacific (CP-T) stands out as a little cheaper, so there may be a bit more opportunity in that. There has been a real change going on in the North American airline industry, and he thinks those names are going to do the best. (See Top Picks.)