Union Pacific - Railroads in America I (BUY - 200)

Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, engages in the railroad business in the United States. It offers transportation services for agricultural products, including grains, commodities produced from grains, fertilizers, and food and beverage products; coal and sand, as well as petroleum, liquid petroleum gases, and renewables; and construction products, industrial chemicals, plastics, forest products, specialized products, metals and ores, and soda ash, as well as intermodal and finished vehicles.

As of December 31, 2018, its rail network included 32,236 route miles linking Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways. Union Pacific Corporation was founded in 1862 and is headquartered in Omaha, Nebraska.

Union Pacific's share price, EBIDTA & revenues

Union Pacific
together with Norfolk Southern, CSX Corp, Canadian National Railway constitute an oligopoly in the U.S. when it comes to railway freight. Since the majority of the railways were built in the 19th-20th centuries there is a small likelihood that more railways and more railway companies will emerge, solidifying the grip on the sector by these 4 railway companies.

Union Pacific's rail network expands over 23 states;

U.S. freight railroads
are separated into three classes, set by the Surface Transportation Board, based on annual revenues:

  • Class I for freight railroads with annual operating revenues above $346.8 million in 2006 dollars. In 1900, there were 132 Class I railroads. Today, as the result of mergers, bankruptcies, and major changes in the regulatory definition of "Class I", there are only seven railroads operating in the United States that meet the criteria for Class I. As of 2011, U.S. freight railroads operated 139,679 route-miles (224,792 km) of standard gauge in the U.S. Although Amtrak qualifies for Class I status under the revenue criteria, it is not considered a Class I railroad because it is not a freight railroad.
  • Class II for freight railroads with revenues between $27.8 million and $346.7 million in 2000 dollars
  • Class III for all other freight revenues.

Particularly interesting is the fact that freight demand has increased due to the shale-oil revolution in the U.S. by utilising freight-railroad as a source of transportation rather than trucks & pipelines.

Graphically, one quickly sees that the majority of U.S. shale oil deposits are located in states that have a well-developed network of railway freight.

EIA projections of tight-oil (shale oil*) development in the U.S. the coming decades;

It is thus clear that railway freight demand will increase, which will benefit Union Pacific and the three other big players in the railway freight industry, and therefore see more room for upside for the stock.

Consensus EBITDA for 2019, 2020 and 2021

We therefore give Union Pacific a BUY, with a target price of 200$ until the end of Q1 or Q2 - 2020.

Profiting strategies on the future developments surrounding the stock are numerous;

1. Purchasing a deep-in-the-money call-options with a strike at 175$, (with an expiry 1-1.5 years in to the future*) would offer substantial leverage. Basically entering a synthetic-long-stock position. 

2. Purchasing the stocks themselves.