We’ve been doing a lot of work on the valuation of Union Pacific (UNP) lately and have condensed down our findings into the following three things an owner of this stock should know right now.
The Shares are Overvalued
This does not mean that the share price will crash tomorrow or even that it will not remain overvalued (or get more overvalued) for a long time into the future. The overvaluation is related to what we see as the market’s assumption that a benign and supportive regulatory environment will continue forever. We have no way of knowing how long this regulatory environment will stay in place and neither do you.
We see a fair value range of the mid-$50 level to the mid-$80 level and would not be excited about buying the shares until they traded at about half of present levels. See this article for more information: Union Pacific: This Train Has Already Left the Station
UNP’s Business is Very Strong Right Now
Revenue growth has been good and the firm has pricing power (thanks to the regulatory environment). Profitability is sky high – higher than some Tech firms we cover – and may actually have room to grow a bit from here. It is investing about 45% of its Owners’ Cash Profits (OCP) on investment project and still pays a decent dividend yield of 2.58%.
That said, it looks like most of the profitability improvements has been made already, suggesting there is not a lot of room for the profit growth we saw over the past 10 years – where OCP jumped from the mid-teens percentages to the mid-twenties percentages.
UNP’s Business Will Likely Weaken in the Future
There are changes to UNP’s business environment on the horizon. Its most important cargo – coal – is in secular decline and we don’t think it has the ability to boost prices to offset falling volumes. Another important cargo type – “Intermodal” – will probably be negatively affected by improvements to the Panama Canal and ports on the East Coast of the U.S. See this report for more information: Valuation Driver Analysis of Union Pacific (UNP) 
I know it’s a popular stock for value investors, thanks to Buffett’s 2010 investment in Burlington Northern Santa Fe and Ackman’s 2011 investment in Canadian Pacific (CP). Those investors got in at the right time. For the rest of us, the train has already left the station.