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Union Pacific stock (NYSE: UNP) currently trades at $222 per share, around 20% below its level of $277 in March 2022. In comparison, its peer – CSX stock (NYSE: CSX) saw its stock fall by 8% over the same period. Union Pacific saw its stock trading at around $213 at the end of June 2022, just before the Fed started increasing rates, and is now marginally above that level. In comparison, the S&P 500 gained 47% during this period. The underperformance for UNP can be attributed to a decline in the volume of carloads lately, primarily for its intermodal business, and a decline in its operating margin. Union Pacific’s operating margin has declined from 40.1% in 2020 to 37.7% in 2023.

Returning to the pre-inflation shock level means that UNP stock will have to gain around 25% from here, and we think this will materialize over time. Our detailed analysis of Union Pacific’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

The performance of UNP stock with respect to the index has been lackluster. 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 heavyweights in the Industrials sector, including CAT and HON, and even for the megacap 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? We think UNP stock has some room for growth. We estimate Union Pacific’s valuation to be around $254 per share, about 15% above the market price. Our forecast is based on a 22x expected earnings of $11.30 per share in 2024. The 22x P/E multiple aligns with the stock’s average over the last five years.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how UNP stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Union Pacific and S&P 500 Performance During 2007-08 Crisis

UNP stock rose from nearly $29 in September 2007 to $41 in August 2008 (pre-crisis peak) and fell sharply to $19 in March 2009 (as the markets bottomed out), implying UNP stock lost over 50% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $32 in early 2010, rising roughly 70% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Union Pacific Fundamentals Over Recent Years

Union Pacific’s revenue rose at an average annual rate of 7.6% from $19.5 billion in 2020 to $24.1 billion in 2023. This can be attributed to a strong recovery in demand after the pandemic-induced lockdowns. Furthermore, the company realized substantial pricing gains, passing on the higher costs and higher fuel prices to the customers. For perspective, the company’s average revenue per carload grew 18% between 2020 and 2023, while its total carload volume was up 5%. Union Pacific’s EPS also increased from $7.96 to $10.48 per share over this period. The earnings growth was driven by higher revenues and a 10% decline in total shares outstanding, as the company spent $18 billion on share repurchases between 2020 and 2023.

Does Union Pacific Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Union Pacific’s total debt increased from $28.3 billion in 2020 to $33.3 billion now, while its total cash decreased from around $1.9 billion to $945 million over the same period. It also garnered about $9 billion in cash flows from operations in the last twelve months. The company appears to be in a position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Union Pacific (UNP) stock has the potential for strong gains once fears of a potential recession are allayed. That said, the pressure on the company’s operating margin and a decline in overall volumes lately remains a risk factor to realizing these gains.

While UNP stock appears to have some room for growth, it is helpful to see how Union Pacific’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/10/2024
[2] Cumulative total returns since the end of 2016

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