Union Pacific Corporation (UNP): This Railroad Stands Out from the Others

Page 1 of 2

Investors often have a set of metrics that they use to analyze and value each company they investigate. Each of these metrics can be useful, but it is dangerous to apply one set of analytical tools to all companies. Instead, investors should customize the set of metrics used to evaluate potential investments on a company-by-company basis.

For instance, investors who are interested in investing in a bank are not going to put much emphasis on its price-to-earnings ratio or operating margin. Instead, investors should focus on a bank’s return on equity and price-to-book (or price-to-tangible book) because those metrics are more relevant to the analysis.

Union Pacific Corporation (NYSE:UNP)

Sometimes, investors may need to create their own metrics to evaluate a company. For instance, EBITDA per room may be usefulwhen comparing one hotel’s profitability to another. However, plain vanilla metrics usually work just fine.

Key to railroad analysis: return on assets

Since railroads are capital intensive, it is extremely important that the firms utilize their assets in the most efficient manner possible. Return on assets — net income divided by total assets — is a simple way of measuring how efficiently a railroad uses its assets.

Union Pacific Corporation (NYSE:UNP) is an example of a railroad that has started to utilize its assets more efficiently as of late. The rising price of oil has boosted rail traffic industry-wide, but Union Pacific has magnified the effect by making significant improvements to its cost structure. As a result, the company raised its return on assets from 4.5% in 2009 to 8.4% in 2012 — an enormous improvement that makes it one of the most efficient operators in the industry.

What’s more, the frothy state of the railroad industry is allowing the company to re-up expiring long-term contracts on favorable terms; return on assets may yet improve even more as a result.

Kansas City Southern (NYSE:KSU) is on the other end of the spectrum from Union Pacific Corporation (NYSE:UNP). Having grown assets at about the same rate as sales over the last decade, the railroad has struggled to improve its dismal return on assets (it earns a low- to mid-single digit ROA).

But Kansas City Southern can improve its return on assets if it can increase traffic on its track. Instead of relying on its own cars to earn the bulk of its profits, the firm offers concessions to other railroads so that it can utilize all of its capacity. This should, in theory, lead to above-average return on assets, but management has yet to achieve this feat.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!