Union Pacific Stock Gives Every Indication Of Being Significantly Overvalued
- By GF Value
The stock of Union Pacific (NYSE:UNP, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $226.17 per share and the market cap of $150.2 billion, Union Pacific stock is believed to be significantly overvalued. GF Value for Union Pacific is shown in the chart below.
Because Union Pacific is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.8% over the past three years and is estimated to grow 0.76% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Union Pacific has a cash-to-debt ratio of 0.04, which is in the bottom 10% of the companies in Transportation industry. The overall financial strength of Union Pacific is 4 out of 10, which indicates that the financial strength of Union Pacific is poor. This is the debt and cash of Union Pacific over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Union Pacific has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $19.3 billion and earnings of $7.73 a share. Its operating margin is 39.80%, which ranks better than 96% of the companies in Transportation industry. Overall, the profitability of Union Pacific is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Union Pacific over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Union Pacific is 2.8%, which ranks in the middle range of the companies in Transportation industry. The 3-year average EBITDA growth rate is 5.3%, which ranks in the middle range of the companies in Transportation industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Union Pacific's ROIC is 9.67 while its WACC came in at 7.69. The historical ROIC vs WACC comparison of Union Pacific is shown below:
In summary, the stock of Union Pacific (NYSE:UNP, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Transportation industry. To learn more about Union Pacific stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
