25 March 2020 16:33

Siberia Wolf Wolf

HARRISBURG — Gov. Tom Wolf on Tuesday quietly allowed gun shops to reopen on a limited basis during the coronavirus pandemic after several justices of the Pennsylvania Supreme Court urged him to do so. Firearms dealers may now sell their wares by individual appointment during limited hours as long as they comply with social distancing guidelines and take other measures to protect employees and customers from the coronavirus, the governor's office said. More: High court dismisses gun shop's challenge to Wolf shutdown order The Pennsylvania Supreme Court had narrowly dismissed Prince's suit, which challenged Wolf's authority to shutter businesses deemed "non-life-sustaining." Union Pacific Corporation is rarely traded even close to fair value - and a few days back, it finally broke the barrier and is now trading below 15 times earnings. (Author's note: This article is part of a series where I attempt to identify and write about the highest-quality companies currently trading at undervaluation as a result of the corona-induced market panic. I try to combine companies with the highest credit ratings, highest safeties, and highest yields to form the basis of excellent, safe investments during this time.) Today, we look at Union Pacific Railroad (NYSE:UNP).

Established in the early 1860s and with headquarters found in Nebraska, it has been acquiring railroad companies and transport companies for the past 50 years. It's also a company with roots going back 170 years at this point, with origins in the Pacific Railroad Act signed by President Abraham Lincoln in order to provide the construction of railroads. UNP is part of a duopoly or an oligopoly in the US - the other parts of that oligopoly being the BNSF Railway and Norfolk Southern (NYSE:NSC), and BNSF is no longer a publicly-traded company. In total, the company owns and operates over 32,340 miles of railroads which in turn link together 23 states, primarily (as you can see above) found in the western portion of the USA. So, Union Pacific corporation owns and maintains the railroads, trains, boxcars, and assets in order to facilitate nation-wide logistics.

The company's revenue here in part comes from the transport of so-called frac sand generated by oil and gas drilling, which exposes UNP to crude differentials and movements on the energy market. It's why I'm always interested in owning railroad and railroad companies, and why I'm annoyed that European operators, for the largest part, are state-owned and not buyable. Huge barriers to entry, as you have to construct railroad networks as well as maintaining them - something not many companies are interested in in this day and age. Over the past years, UNP has also spent over $34B in maintaining and making certain the transportation network is in good shape. Rather than going down in the financial crisis, management was able to cut costs and boost company margins despite lower volumes.

The company has been operating here for a few years now and is the only railroad provider to offer service to all six U.S/Mexico Gateways - from Brownsville in the east to Calexico in the west. The fact that the company not only transports goods for the US market, but also manages shipping containers from A to B gives UNP some excellent growth potential with Asian and LATAM markets. When large volumes of goods need transporting over land, whether it's agricultural, industrial or otherwise, railroad will be one of the choices made. Because UNP is one of the best companies in its market, and with all the benefits mentioned earlier, it's extremely hard for entrants to compete with this company. Union Pacific Corporation - How has the company been doing?

EPS was down 10 cents YoY, operating ratio was down a few percentage points, and overall volume growth in certain key areas was, for lack of a better word, bad. Well, here, we're starting to see what a non-optimal energy market does to UNP's earnings. This exposure to what I consider to be a dying sort of fuel is perhaps part of the biggest problem for the Energy segment that UNP is facing at this time. In terms of 2020 outlooks - though this is pre-corona, the company expected lower volumes in coal, sand, and automotive, with growing volumes in biofuels, food, plastics, construction, and petroleum. Despite these recent uncertainties, I want to point out that the company is excellent at what it does - and earnings growth since the recession has been excellent. UNP pays out below 50% of earnings in dividends and debt is - at 2.27 NTM net debt/EBITDA - something I consider a non-issue, with an 8.2X interest coverage ratio. The company sports a high, Very Safe rating from SimplySafeDividends - but perhaps most impressive of all is its excellent dividend growth rate of almost 16% annually for the past 20 years. So, despite some recent headwinds in the energy and international sector, which certainly aren't unique for UNP in its current situation, the company has been doing well for the past 10 years. While the company did address issues occurring during downturns, revenues still fall considerably whenever there is a fundamental issue with something that UNP transports. The company's high dependence on coal shipments is very likely to become a liability going forward. The company, as all train companies do, have high amounts of CapEx, in the form of maintenance for tracks and locomotives, fuel and other things. UNP is one of the last businesses in the US that's highly unionized. There's also a high amount of regulatory risk tied to the operation of train tracks and this type of transportation. Due to commodity differentials when it comes to certain types of commodities to which UNP has exposure, there is potential for non-recessionary drops in this company. Historically speaking, and there's little to indicate that this time will be different even if recovery can take longer, UNP has always commanded a very high premium on the market, trading closer to 18 times earnings rather than 15. UNP is now yielding ~3.3%, and this is a Grade-A conservative company with an A- credit rating and an excellent sub-50% EPS payout ratio. The same number turns onto a ~22% CAGR if we use the company's historical premium of nearly 20 times earnings - but I consider this to be too optimistic to base a forecast on. Let's instead say that your potential annual return would likely exceed 10% per year, and that from investing in a conservatively safe and resilient company like UNP. The three misses over 10-year periods were understandable ones, with them being limited to the recession in '09 as well as the company's issues during the energy crisis in 2015-2016. Numbers for this company look good no matter which way you slice it - the issue is the uncertainty, and that's a big one. Me, I choose to use this as the basis of my current thesis on UNP. While I'm completely unwilling to consider UNP "fairly" valued at 18-20 times earnings as the market does, I do believe the current share price marks an undervaluation compared to a fair value of 15X. Not a big one, mind you - around 8% - but still a very good one for this company. UNP is not a company typically acquired on the cheap. UNP is currently undervalued at least 5% to fair value. For a company that's almost never undervalued, this is remarkable enough to make UNP a "BUY" for certain. I've wanted this company as part of my portfolio for many years. Due to recent corona-induced undervaluation, a 5-8% undervalued UNP (to fair value) is currently a "BUY". I have no business relationship with any company whose stock is mentioned in this article. It was only yesterday that we were discussing Pennsylvania Governor Tom Wolf's decision to close all of the gun shops in his state during the coronavirus lockdown, deeming them nonessential businesses, and the state supreme court's ruling that he was able to do so. Despite his legal victory at the state's highest court, Wolf has now relented and will allow gun shops to remain in business, albeit on a limited basis. Pennsylvania gun stores will remain open on a limited basis after Democratic governor Tom Wolf reversed course on his emergency coronavirus shut-down order on Tuesday. The updated order says gun stores may only operate "to complete only the portions of a sale/transfer that must be conducted in-person under the law," likely referring to the completion of a background check, which must be done in person… The order requires that stores must operate on an "individual appointment" basis and only "during limited hours." Dealers must also "comply with social distancing, sanitization of applicable area between appointments, and other mitigation measures to protect its employees and the public," according to the updated order.