Union Pacific has been treading water for the past six months, recording a small loss of 1.9% while holding steady at $225.97.
Is there a buying opportunity in Union Pacific, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Union Pacific Will Underperform?
We're sitting this one out for now. Here are three reasons why we avoid UNP and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Rail Transportation company because there’s a ceiling to what customers will pay.
Over the last two years, Union Pacific’s units sold averaged 2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Union Pacific’s EPS grew at an unimpressive 5.3% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.4% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Union Pacific’s margin dropped by 6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Union Pacific’s free cash flow margin for the trailing 12 months was 11.3%.
Final Judgment
Union Pacific falls short of our quality standards. That said, the stock currently trades at 18.9× forward P/E (or $225.97 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Union Pacific
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