After an 80% rise since the March 23 lows of this year, at the current price of around $206 per share we believe Union Pacific’s stock (NYSE:UNP) has reached its near-term potential. UNP stock has rallied from $114 to $206 off the recent bottom compared to the S&P which moved 55%, with the resumption of economic activities as lockdowns are gradually lifted. UNP stock is also up 63% from levels seen in early 2018, two years ago.
UNP stock is 12% above the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year.
Some of the rise of the last 2 years is justified by the roughly 2.2% growth seen in Union Pacific’s revenues from 2017 to 2019. While the company’s Net Margins on a GAAP basis contracted from 50.4% to 27.3%, margins were higher in 2017 due to one-time tax adjustments related to changes in the tax law. On an adjusted basis, Union Pacific’s margins actually improved from 21.8% to 27.3%.
With the steady revenue and earnings growth over recent years, Union Pacific’s P/E multiple has also expanded. We believe the stock is vulnerable to downside risk after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard – What Factors Drove 63% Change in Union Pacific Stock between 2017 and now? – has the underlying numbers.
Union Pacific’s P/E multiple changed from 9.4x in 2017 to 21x in 2019. While the company’s PE is now 24.5x, there is a downside risk when the current P/E is compared to levels seen in the past years. P/E of 17x at the end of 2018 and 21x as recently as late 2019.
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