The State of the Union Pacific (UNP)

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Last night, the President delivered the delayed State of the Union address to a joint session of Congress. The speech and the response of the assembled politicians were largely what we have come to expect. A bit of bragging and calls for unity juxtaposed with divisive language, with half of the attendees sitting on their hands while the other half bob up and down like gulls on a storm-stirred sea. As usual, it told us nothing about the state of the economy and even less about potential economic policy.

The market reacted with a shrug; futures fell slightly after the speech and we all moved on.

The State of the Union is political theater. If you want to know about the state of the economy, a far better read can be had by looking at the state of the Union Pacific (UNP). Union Pacific is not the largest railroad in the U.S., that honor goes to Burlington Northern Santa Fe (BNSF). They, however, are owned by Berkshire Hathaway (BRK-A), leaving Union Pacific as the largest publicly quoted railroad.

Obviously, there are limits to what the state of UNP can tell us. Its operations are concentrated in the West of the country, and not every industry uses railroads. It tells us nothing about tech, for example, nor any of the increasingly important service industries.

However, most observers would, to some extent at least, agree with the President that the manufacturing sector is essential to the U.S. economy, and rail traffic is a decent indicator of health there.

It is also indicative of activity in the energy sector, as crude shipments make up a large part of U.S. railroads’ revenue. Even more significantly, it is a leader in the more generalized transportation sector which many consider to be a leading indicator for the broader market.

I am therefore pleased to report that, as you can see from the chart below, the state of the Union Pacific is strong.

To be fair, much of the strong performance of UNP is down to company-specific things.

Last month they hired Jim Venna, who built his reputation at Canadian National (CNI), as COO. That is part of a transition to a more efficient business model that is paying off. They have managed to increase traffic while parking some locomotives and are cutting costs rapidly. That is mainly why they beat expectations for EPS in Q4 earnings released a couple of weeks ago, earning $2.12 per share versus the consensus estimate of $2.06.

The number from that earnings report with implications for the broader market, however, was revenue, which grew by six percent from the year before. That is not spectacular, but it does suggest that the effects of the trade war with China on U.S. manufacturing companies may not be as bad as feared. If that is the case it is a very big deal.

Three big worries pushed the market lower last quarter, slowing global growth, rate hikes, and the effects of the trade war. There is, as yet, no evidence of a collapse in growth and the Fed has given in to the market pressure and backed off its commitment to further interest rate increase. That leaves the impact of the trade war as a worry, so any indication that that may be less than feared is significant.

Even so, looking at the state of the Union Pacific, the most obvious conclusion is that the stock itself is a buy.

The changes being made will produce long-term benefits. Parking up some rolling stock and improving efficiency gives the company more flexibility to handle the cyclical nature of its business, allowing for continued growth without massive capital expenditure. It also increases the safety of the dividend and allows for the payout to continue to increase. Given that and the expectation of further growth, UNP still looks like value, even after gaining around seventeen percent year to date.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks , Investing Ideas
Referenced Symbols: UNP

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