Union Pacific Stock Fully Valued Around $200?

Union Pacific’s stock (NYSE:UNP) trades at $202 currently and it has gained 13% in value so far this year. It traded at a pre-Covid high of $183 in February, and it is currently 11% higher than that level. Also, UNP stock has gained 78% from the low of $113 seen in March 2020, with gradual opening up of economies, resulting in increased transportation demand after the lockdown phase in early Q2. That said, going by historical performance, and in view of the strong rally in UNP stock since late March, we believe that UNP stock is fully priced and it has little room for growth in the near future. Our conclusion is based on our detailed analysis of Union Pacific’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 51% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Union Pacific UNP stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Union Pacific Stock Performance Over 2007-08 Financial Crisis

We see UNP stock declined from levels of around $22 in September 2007 (pre-crisis peak for markets) to levels of around $15 in March 2009 (as the markets bottomed out), implying UNP stock lost 33% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $25 in early 2010, rising by 73% between March 2009 and January 2010.

S&P 500 Performance Over The 2007-08 Financial Crisis

S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.


How Do Union Pacific’s Fundamentals Look In Recent Years?

Union Pacific’s Revenues declined marginally from $21.8 billion in 2015 to $21.7 billion in 2019, primarily due to a decline in Coal Freight offsetting the gains in other segments. This can be attributed to an overall decline in the demand for coal with the more cleaner form of energy – natural gas – trading at favorable prices. Despite the decline in revenues, the company managed to expand its margins with its focus on reducing its operating ratio, which declined from 62.9% in 2015 to 60.6% in 2019. This resulted in EPS increasing from $5.51 per share in 2015 to $8.41 in 2019.

Survival Check

Does Union Pacific Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Union Pacific’s total debt increased from $14.2 billion in 2016 to $23.9 billion in 2019, while its total cash decreased from $1.3 billion to $0.8 billion over the same period. The company also generates over $8.0 billion in cash from its operations, and it appears to be in a good position to weather the crisis.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and in view of the strong rally in Union Pacific stock since late March, we believe that the stock has little room for growth in the near future, and it is fully priced at around $200.

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