Should You Pick Union Pacific Stock At $250 After 20% Gains Last Year And Q4 Beat?

Union Pacific (NYSE: UNP) reported its Q4 results last week, with revenues and earnings beating the street estimates. However, we believe that UNP stock is fully valued, as discussed below. The company reported revenue of $6.2 billion, reflecting no growth from the prior year period and slightly above the consensus estimate of $6.1 billion. Its earnings of $2.71 per share were up 1% y-o-y and above the street estimate of $2.56 per share. In this note, we discuss Union Pacific’s stock performance, key takeaways from its recent results, and valuation.

UNP stock has witnessed gains of 15% from levels of $210 in early January 2021 to around $245 now, vs. an increase of about 30% for the S&P 500 over this roughly three-year period. However, the increase in UNP stock has been far from consistent. Returns for the stock were 21% in 2021, -18% in 2022, and 19% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that UNP underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks, for other heavyweights in the industrial sector, including CAT, GE, and HON, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UNP face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, UNP stock looks like it is appropriately priced. We estimate Union Pacific’s Valuation to be $251 per share, close to its current levels of $245. Our forecast is based on a 22x P/E multiple for UNP and expected earnings of $11.28 on a per-share and adjusted basis for the full year 2024. This aligns with UNP’s last five-year average P/E multiple.

Union Pacific’s revenue of $6.2 billion in Q4 was flat y-o-y as a 3% rise in total volume was offset by a 3% decline in average revenue per unit. Lower fuel surcharge revenue and intermodal demand weighed on the company’s top line. Looking at segments, Bulk sales were flat, Industrial revenue was up 4%, and Premium, which includes Intermodal, saw its sales decline 3% during the quarter. Union Pacific saw its operating ratio improve by 10 bps to 60.9%. Flat revenues and a slightly better margin led to a 1% y-o-y rise in the bottom line to $2.71 per share in Q4’23.

UNP stock is trading at 6.2x sales compared to the last five-year average of 6.1x, implying that it is fully valued going by the historical valuation multiple. We believe investors will likely be better off waiting for a dip to enter UNP for better gains in the long run. Furthermore, fears of a potential recession and its impact on the railroad business remain a key risk factor for Union Pacific’s near-term performance.

[1] Returns as of 1/31/2024
[2] Cumulative total returns since the end of 2016

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