ModernGraham.com - the source article from above, thought it will be instructive for us to see how a checklist is applied diligently.
Company Review: Union Pacific Corporation (UNP)
Company Profile:Union Pacific Corporation (obtained via Google Finance)
Union Pacific Corporation (UNP) operates primarily as a rail transportation provider through Union Pacific Railroad Company (UPRR or the Railroad), its principal operating company. UPRR is a Class I railroad that operates in the United States. UPC has approximately 32,426 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways and providing several north/south corridors to key Mexican gateways. UPC serves the western two-thirds of the United States and maintains coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada and Mexico. Export and import traffic is moved through Gulf Coast and Pacific Coast ports, and across the Mexican and Canadian borders. The Railroad’s commodity revenue consisted of six commodity groups: agricultural, automotive, chemicals, energy, industrial products and intermodal.
Business and Management Review**
**_1) Is the business simple and understandable?
_Union Pacific is in the transportation business.Transportation is a simple and understandable business.The companyas main focus is rail transit and they operate 8,400 locomotives on over 32,400 route miles in 23 states.
_2) Does the business have a consistent operating history?
_In 1848, the Galena and Chicago Union Railroad began operating.Later, this company would eventually become the Union Pacific Railroad after some mergers.In 1862, President Lincoln signed into law the Pacific Railroad Act a designating the Union Pacific as one of the two railroads responsible to build the first transcontinental railroad (which was completed in 1869).Over the years, Union Pacific has dealt with bankruptcy, countless mergers, recessions, depressions, and 33 different U.S. Presidential Administrations.Throughout its history, it has been a railroad operator without question.
From a financial standpoint, UPC has paid a dividend for over 10 years, and has had only one year with a net loss in the last 10 years.
_3) Does the business have favorable long term prospects?
_The rail industry will continue to be around until we no longer need to move materials too heavy to fly.In other words, the rail industry should be around a very, very long time.Union Pacific should be able to survive any stress that may come its way as it has proven through its survival of multiple issues throughout its history.The company maintains a strong advantage in its well-recognized brand image and the sheer size of the company.
_4) Is management rational?
_Management appears to be rational in its efforts.Having reviewed the company, we believe in managementas strive toward operation efficiency, safety, better fuel efficient locomotives and other aspects of the companyas long term plan.We have found no reason to doubt managementas rationality.
_5) Is management candid with its shareholders?
_In the companyas annual reports, the letter to shareholders is one of the more informative letters we have seen.Details of the corporationas strategies, issues that came up, and some forward looking statements are included.In addition, the company has an impressiveinvestor relationssite.While youare there, check out the history section for the general public.It has some very interesting reading!
_6) Does management resist the institutional imperative?
_We believe the management has always resisted the institutional imperative.Unfortunately (or maybe fortunately, as it led to some of the laws that govern businesses today and support investors) the history of Union Pacific in the nineteenth century includes tales of bribery and fraud a but we donat need to worry about todayas management.
Financial and Value Review
__1) Size of firm
_At a market cap of over $24 billion, the company passes the requirement of $2 billion.
_2) Strong financial condition
_The companyas current ratio is not suitable for the defensive investor.
_3) Earnings stability
_The company had a net loss in 1998 so it does not pass this requirement either.
_4) Dividend record
_Union Pacific has paid a dividend for over 10 years.
_5) Earnings growth
_Earnings per share have not grown suitably in the last 10 years for the defensive investor.
_6) Price to earnings analysis
_With a PE ratio (usingour Methods) of 24.94, the requirement of under 20 is not met.
_7) Price to assets analysis
_Since the PB ratio is 1.67, it makes up for the high PE ratio, and the company passes the final 2 tests.
_Having passed only 4 of the required 8 tests for the defensive investor following Benjamin Grahamas value investing strategy, we do not believe Union Pacific is suitable for the defensive investor.
__1) Strong financial condition
_With a poor current ratio, the company fails this test.
_2) Earnings stability
_The company has achieved a positive net income for over 5 years.It passes the test.
_3) Dividend record
_The company currently pays a dividend.Pass.
_4) Earnings growth
_Earnings are greater today than they were 5 years ago.
_We find the company to be suitable for the enterprising investor.
__Our valuation model finds a fair value to be around $95.
__Since the company is currently trading at $90, we feel it is fairly valued but may be a suitable investment for the enterprising investor.
Neither of us held a position in Union Pacific Corporation at the time of publication. Also, please read ourdisclaimerandOur Methods.