As Warren Buffett said when he bought Burlington Northern Santa Fe (BNI), this buy is a bet on the strength of the U.S. economy. Union Pacific (UNP) isn’t an especially well-run railroad historically, but it is run well enough so that the transcontinental road will get a big boost from the recovering U.S. economy in the first half of 2010—and expectations for further improvement in the second half.
I’m not convinced that expectations for second half growth will prove out, which is why I’m keeping this buy on a very short-term leash. But I think momentum—both in stock price and in the U.S. economy—will make this a profitable short-term way to take advantage of the relative out performance of the U.S. stock market in the first half of the year. (For more on why I believe that out performance is likely to continue for a few months see my post https://jubakpicks.com/2010/03/19/how-long-can-this-last-the-u-s-stock-market-is-out-performing-the-world/ )
When Union Pacific reported fourth quarter 2009 earnings back in January, the company not only beat Wall Street expectations for the period (with $1.08 a share when estimates called for $1.04), but signaled its belief that traffic would pick up in spring. Data from February argues that management was right on the mark.
Total U.S. and Canadian rail traffic for the last week in February was up 6.4% from the same week in 2009. Traffic for the entire month increased by 2.1% from February 2009 despite a snow-related drop in traffic in mid-February. The growth was driven by what railroad analysts call economically sensitive carloads (traffic in commodities and products that fluctuates with the state of the economy). That part of total railroad traffic climbed 8% from February 2009. Big gains came in chemical, metals, and auto volumes.
Growth in traffic volumes at Union Pacific actually exceeded overall railroad volume growth. For February volume was up 14% from February 2009.
The one worry for all the transcontinental roads is the softness in coal traffic caused by big stockpiles at utilities that burn coal to generate electricity. Because of the mix and location of the utilities that Union Pacific serves that doesn’t seem to be as big a problem for the company as it does for competitors such as CSX (CSX). In February Union Pacific’s coal volumes were up 5% from February 2009 and management has predicted that coal volumes will return to normal by summer.
April brings the real test for Union Pacific and my projections for growth in traffic. That’s the month when large customers sign contacts for fall shipping. Signs so far suggest that prices will trend upward.
As of March 19, 2010, I’m adding Union Pacific to Jubak’s Picks with a target price of $81 a share by June 2010. On March 19 the stock paid a dividend of 1.5%.
Full disclosure: I don’t own shares of any company mentioned in this post.
aareding, if you’re buying a stock as a long-time hold then, yes, ROIC is cirically important. UNP isn’t a long-term buy. The compounding effect of a high ROIC therfore isn’t especially powerful. I’m going with momentum here rather than fundamentals. People believe the economy is picking up, railroads go up with the economy, there aren’t many railroads to buy, hence the pick.
RM, the difference betwen the CNI and UNP picks is the holding period. CNI as added as a long term buy–5 years or more hopefully. UNP is a short-term momentum play. I’d be surprised if I held this in six months.
I bought CNI a while ago.
Hi Jim. This is my first comment since registering. I don’t understand the BUY recommendation, based on what you said earlier about Return On Investment, which in this case is only 5%, but with a P/E well above 15. Wouldn’t that suggest this stock price is on the high side (to put it delicately)?
If you are buying rails then what about TGH. Increased car loads and increased international trade equal more containers, I think.
Anyway, a good dividend and I don’t care which rail or shipping company wins as long they do “intermodal” .
Hey, BPT sold 9X normal volume today and now pays a 17% dvidend.
Jim you see yourself entering this pick?
The article and comments brought to mind an older article by Mr. Jubak. It’s from 4/24/07, on Buffett, ROIC and the railroads, if anyone wants to check it out. (Not sure if it’s ok to post a link here.)
Had the same problem then, CNI or UNP? Right now, I’d be more comfortable under $68 for UNP.
Rolling the dice on a MXWL re-entry sounds even better today. 🙂
I’m a big railroad fan, but I agree that UNP is to rich for my blood right now….but as Jim said It’s probably a good bet for any momentum investers out there. If I were a gambling man, I’d bet it will be cheaper in about a week. But I’m not so I’ll sit this one out.
Likewise dmartin11. I also have been waiting on CNI. I think the railroads are a long term bet and I’d like to put CNI in the portfolio for the duration. I haven’t really researched UNP. Its at about 73–a dollar below it 52 week high. Its low was 38.38. That is a little high for an entrance but I need to take Jim’s article into consideration and do my research. But at 73 I don’t think its happening. I would love to hear where you would considering entering.
UNP vs CNI (a Buy on Jan 5) – what is different?
This is a great pick, but I’m personally waiting for a better entrance point, gambling on a short term retreat at some point? Anybody else?