- Much of Union Pacific’s business stands to be hurt by the announced policies of the Trump administration.
There’s no way around it – Union Pacific’s business thrives on trade. Intermodal freight – Union Pacific’s largest shipping category by revenues – has a large exposure to international trade and transporting containers from Los Angeles and Long Beach to Chicago and other inland terminals. Agriculture and Automotive freight has a huge dependence on NAFTA-related flows of goods – both imports and exports. These categories are likely to be severely impacted by the Trump administration’s stated trade policies. One freight category – Industrial – is likely to be boosted by Trump’s border wall and whatever infrastructure spending is actually done, but this will be too small of a bump to offset slow-downs in other areas. President Trump believes he can regulate a rebound in coal. He can’t. The death of coal has a lot to do with economics and physics, and the laws of both fields are not subject to government prerogative.
- Our analysis suggests that the company’s executives are “battening down the hatches” to prepare for a tough operating environment in the near future.
The company looks as though it scrambled to conserve cash by careful working capital management and also dialed back its 2016 investment spending. 2017 spending on locomotives is also likely to be cut nearly in half. All management teams signal to the market and to their investors. We believe Union Pacific’s management team is signaling that difficult operating conditions lie ahead.
- We believe the positive “Balance Sheet Effect” of Union Pacific’s kid gloves regulatory environment is now balanced by a negative Balance Sheet Effect from its exposure to international trade.
Show me an admirer of “free market economics” and I’ll show you someone who is severely deluded. The US railroads are heavily subsidized at the expense of shippers and the consumers who buy their products. We discuss the evolution of the lax regulatory environment which leads to these subsidies in our earlier reports on Union Pacific.
This dynamic convinced us in April 2016 not to take a bearish position in this stock – a decision which saved us 10 months and counting of frustration and unrealized position losses. However, at the present time, we believe the positive effects of lax government regulation are offset by the potential large negative effects of the disruption to international trade mentioned in our first bullet point.
No investor can escape from market risk, but we believe a bearish investment in Union Pacific to have very little valuation risk.