Union Pacific Corporation (UNP) in Omaha, Neb., is in the railroad business in the United States. Its stock has gained 22.8% in price over the past year and 20.6% year-to-date to close yesterday’s trading session at $251.03. It is trading above its 50-day and 200-day moving averages.

UNP posted solid third-quarter earnings, with double-digit topline and bottom-line growth. However, extended chassis dwell times and a lack of dray drivers dampened UNP’s intermodal traffic in the quarter. Also, the company recently slashed its full-year volume and operating ratio growth forecast because supply chain logjams are pressuring its volumes. The company now expects its 2021 volumes to grow approximately 4%, down from the approximate 5% growth it forecasted in October, which was below its 7% volume growth forecast earlier this year. The lower projections are attributed to unabating supply chain disruptions in its intermodal and automotive shipments, such as logjams at ports, and truck driver and chip shortages. UNP expects its operating ratio to rise some 150 basis points, down from the 175 points forecast earlier.

Nevertheless, UNP declared a 10% increase in its quarterly dividend to $1.18 per share earlier this month, payable on December 30, 2021. This marks its second dividend hike this year. The dividend hikes align with UNP’s 45% target dividend payout ratio. The robust shareholder returns, improving freight market, and its stable growth in its most recent quarter helped UNP hit a fresh 52-week price high of $251.77 on December 29.

Here is what could shape UNP’s performance in the near term:

Stretched Valuation

UNP’s 8.76 forward EV/Sales ratio is 328.5% higher than the 2.04 industry average. In terms of forward Price/Sales, UNP is currently trading at 7.44x, which is 349.6% higher than the industry 1.66x average. UNP’s 11.96x forward Price/Book is 296.9% higher than the 3.01x industry average.

Mixed Past Performance

UNP’s revenues have declined at a 2% CAGR over the past three years, while its net income declined at a 19.1% CAGR over the past three years. The company’s EPS also decreased at a 15% CAGR over the same period. However, its levered FCF has increased at an 11.1% CAGR over the past three years. Furthermore, its EBIT and EBITDA grew at CAGRs of 1.3% and 1.1%, respectively, over the period.

Impressive Profitability

UNP’s gross profit and net income margins of 59.09% and 29.19%, respectively, are 101.7% and 358.4% higher than the 29.29% and 6.37% industry averages. Furthermore, UNP’s 39.80%, 9.93%, and 12.18% respective ROE, ROA, and ROTC, compare with the 13.58%, 5.12%, and 6.69% industry averages.

Solid Latest Quarterly Report

UNP’s total operating revenues increased 13% year-over-year to $5.57 billion in its fiscal third quarter, ended September 30. Its operating income rose 20% from its year-ago value to $2.43 billion. Its net income came in at $1.67 billion, indicating a 23% increase year-over-year. The company’s EPS increased 28% year-over-year to $2.57.

POWR Ratings Reflect Uncertain Prospects

UNP has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value, consistent with its lofty valuation.

UNP has a C grade for Growth. Its mixed past performance justifies this grade.

Of the 15 stocks in the Railroads industry, UNP is ranked #2.

Beyond what I have stated above, one can also view UNP’s grades for Quality, Sentiment, Momentum, and Stability here.

View the top-rated stocks in the Railroads industry here.

Bottom Line

With resurgent COVID-19 cases and its omicron variant threatening the global economic recovery, supply issues may persist longer than expected and may negatively affect UNP’s current quarter’s growth. Furthermore, the company has cut its full-year volume and operating ratio growth forecast. Also, the stock seems to be overvalued at its current price level. Thus, we think it could be wise to wait for a better entry point in the stock.

How Does Union Pacific Corporation (UNP) Stack Up Against its Peers?

While UNP has an overall POWR Rating of C, one might want to consider looking at its industry peer, ComfortDelGro Corporation Limited (CDGLY), which has an A (Strong Buy) rating.

UNP shares were trading at $249.49 per share on Thursday morning, down $1.54 (-0.61%). Year-to-date, UNP has gained 22.12%, versus a 29.58% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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