One of Wall Street's biggest winners of the day is Union Pacific, a railroads company whose shares have climbed 3.1% to a price of $279.39 -- near its average analyst target price of $291.05.
The average analyst rating for the stock is buy. UNP may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 5.7% over the last year, returning 22.0%.
Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, operates in the railroad business in the United States. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.
Union Pacific's trailing 12 month P/E ratio is 23.0, based on its trailing EPS of $12.15. The company has a forward P/E ratio of 20.4 according to its forward EPS of $13.69 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the industrials sector has an average P/E ratio of 24.03, and the average for the S&P 500 is 29.3.
UNP’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Union Pacific, we obtain a PEG ratio of 3.31, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
Union Pacific's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2025 | 9,290,000 | 3,791,000 | 5,499,000 | -6.7 |
| 2024 | 9,346,000 | 3,452,000 | 5,894,000 | 23.49 |
| 2023 | 8,379,000 | 3,606,000 | 4,773,000 | -16.88 |
| 2022 | 9,362,000 | 3,620,000 | 5,742,000 | -5.81 |
| 2021 | 9,032,000 | 2,936,000 | 6,096,000 | 8.61 |
| 2020 | 8,540,000 | 2,927,000 | 5,613,000 |
- Average free cash flow: $5.6 Billion
- Average free cash flown growth rate: -1.2 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in UNP have received an annualized dividend yield of 2.0% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Union Pacific's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 8, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 2.89 as of the third quarter of 2024.
With a Very low P/E ratio, a higher than Average P/B Ratio, and positive cash flows with a flat trend, we can conclude that Union Pacific is probably overvalued at current prices. The stock presents mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio.
