Union Pacific Corporation (
) is the largest railroad network in the United States by the
number of route miles owned. The company operates on nearly 32,000
miles of track, of which it owns about 26,000 miles of track
outright. Union Pacific Railroad (UPRR), the largest class-1
railroad in the United States, is the core subsidiary of Union
Pacific Corporation. UPRR's route map covers most of the central
and western United States serving 23 states and operates on key
north/south corridors and is the only railroad to serve all six
major gateways to Mexico. Although Union Pacific Railroad's primary
role is transporting freight, it also runs a substantial commuter
train operation in Chicago. Union Pacific competes with
Burlington Northern Santa Fe Corporation, which covers much of the
same territory and was acquired by Berkshire Hathaway (NYSE:BRK.A).
It also competes with smaller railroads like CSX Corp (
) and Norfolk Southern (NYSE:NSC).
Launch of Coverage on Union Pacific Corporation; $112
We recently launched coverage activity on
Union Pacific Corporation with a $112 price
for the company's stock, which is around 5% ahead of the market
We have broken down our analysis of Union Pacific into 7 main
Energy Commodities Freight
- Agricultural Commodities Freight
- Industrial Products Commodities Freight
- Chemical Commodities Freight
- Automotive Commodities Freight
- Commuter Rail and Other services
North American Railroads at a Glance
Railroads are an important segment of freight transportation
industry in the United States. They serve many of the fastest
growing U.S. population centers and provide Americans with a
fuel-efficient, environmentally responsible and safe mode of
freight transportation. They move everything - coal and lumber,
automobiles and scrap iron, grains and vegetables as well as
chemicals and oils. Rail transports 42% of United States' freight
(measured in ton-miles), which is more than any other mode of
transportation. With numerous consolidations and acquisitions, U.S.
railroads are monopolistic in nature in that they require massive
scale and carry high barriers to entry for new entrants.
The demand for freight is highly correlated with economic
conditions. For examples, volume levels slumped considerably in
2008 leading to a record decline in the railroad freight revenues.
However, strong demand recovery in 2010 helped railroads bounce,
and we think there's room for more growth especially for coal and
intermodal freight. The total volume levels for 2010 including
carloads and intermodal units are still below 2008 levels and so we
believe railroads have further opportunities for volume growth.
Additional margin expansion will occur from renegotiated legacy
contracts bolstered by high fuel prices for trucking, which is
rail's main competitor.
Energy Demand Will Drive Volume Growth
The energy commodities freight service of Union Pacific consists
of transportation of coal and petroleum coke and accounts for the
largest share of Union Pacific's total freight volume with 43% in
Coal production is rapidly shifting westward, driven by the
rapid growth of production in Southern Powder River Basin (SPRB)
region and the continuing decline of eastern coal sources in
Central Appalachia. The energy commodities volume recovery was
relatively slow in 2010, and we think that coal volumes have
further room to grow looking ahead. We expect coal freight demand
growth in SPRB to accelerate in near future, presenting upside to
Margin Improvement in Intermodal Transport
The segment carries high incremental margins as train lengths
are extended because the additional costs associated with adding
containers to existing trains are low. The intermodal freight
segment of Union Pacific has stiff competition with several truck
carriers. Given the surge in fuel prices, the trucking industry has
been struggling to and forced to raise freight rates. This in turn
benefits UNP which is increases pricing flexibility.
The coal and intermodal segments are highly impacted by contract
renewals and repricings due to a high amount of legacy contracts.
Union Pacific has steadily improved rates during the past few years
primarily through legacy contract renewals and repricings. If
pricing discipline persists and UNP can renew legaciy contracts on
favorable terms, this could present upside to margins and our
See our full analysis of Union Pacific.