Union Pacific’s (UNP) stock price has continued to decline since our June 30th thesis, and the decline continues to be overdone. The decline has been driven partially by a slowdown in business (for example, operating revenue was down 10 percent in the second quarter versus the second quarter of 2014). However, a larger portion of the decline has been driven by a “global economic slowdown” narrative that is overdone.
Union Pacific continues to generate an enormous amount of free cash flow, and is working to “right size” the business. According to UNP CEO, Lance Fritz, “Total volumes in the second quarter were down 6 percent, led by a sharp decline in coal. Industrial products and agricultural products also posted significant volume decreases. However, we made meaningful progress right sizing our resources to current volumes.” Also worth noting, the company did experience growth in automotive and intermodal during the period.
Year-to-date, Union Pacific’s stock is down nearly 17% while the S&P 500 is down only 8%. However, UNP still generated more cash from operations in the first six months of this year than it did for the first six months of 2014. Additionally, UNP’s diversified rail businesses are resilient, and the organization continues to “right size” its operations for the current environment. Fears of a dramatic global slowdown fueled by a China pullback are overdone. Union Pacific stock is undervalued, and it represents an exceptional long-term investment opportunity. To read our complete Union Pacific thesis, click here.