UNION PACIFIC CORPORATION

APRIL 18, 2013

Dan Ballantine & Keaton J. Cervantes
Agenda
 Introduction
 Macroeconomic Outlook
 Industry Overview
 Company Overview
 Financial Analysis
 Valuation
 Recommendation
Union Pacific Corporation
 Incorporated in 1862
 Headquarters is located in Omaha, Nebraska
 45,928 full-time employees (86% under union
contract)
 Operates 31,868 miles of track
 Maintains a fleet of 8,391 locomotives
 Provides rail service to 23 states throughout the
Midwest, Western United States, and Mexico

Source: Union Pacific 2012 10-K

Macroeconomic Outlook
 Continued decline in coal
shipments
 Shale oil boom causes supply
bottlenecks
 Push to modernize fleets
 End of drought brings increased
agricultural shipments
 Increased production in Mexico

Source: Wall Street Journal

Macroeconomic Outlook
 Keystone XL Pipeline
 Intended to relieve the
supply build-up in
Midwest and Canada
 Proposed route crosses the
Ogallala Aquifer
 Permit was denied on
January 18, 2012 by
President Obama

Source: keystone-xl.com
Macroeconomic Outlook
 Keystone XL Pipeline
 Permit was denied based
on possible environment
consequences
 Recent pipeline failure in
Arkansas has reignited
fears of environmental
impact of pipeline
 Approval is uncertain at the
moment

Source: Wall Street Journal

 Macroeconomic Outlook

 US-Mexico Rail Trade

 Steadily increasing
trade values in four
major areas
 Mexico Automotive
Production:
 Projected to increase
38% in the next three
years due to higher
labor costs in China
Source: US DOT Federal Railroad
Administration, Bloomberg
Industry Forces Analysis
Industry Forces Analysis
 Bargaining Power of Suppliers: HIGH
 Some inputs with no pricing power (fuel)
 Low number of locomotive and rail suppliers
 Bargaining Power of Buyers: MEDIUM
 Relatively few industry competitors
 High number of alternatives
 Threat of New Entrants: LOW
 Capital intensive business with high barriers to entry
 Geographic specificity
Industry Forces Analysis
 Threat of Substitutes: HIGH
 Many alternatives to transporting goods including river
barge, trucking, and pipeline
 Rivalry among Competitors: MEDIUM
 Limited companies in the industry
 Limited direct competition due to geographic
differences of the main industry players
Company Overview

Source: Union Pacific Website

 Company Overview

 Freight Revenue (94%)

2012 Freight Revenue
 Agricultural
 Automotive
 Chemicals
 Coal
 Industrial Products
 Intermodal
 Other Revenue (6%)

Source: Union Pacific 2012 10-K

Company Overview
 Positives
 Revenue generated from chemical shipments
(including oil) is up 20% in 2012
 45% of revenue from Mexico is through automotive
shipments
 As the drought weakens, agricultural shipments will
steadily increase
 Increase in fuel costs partially offset by fuel surcharges
 Issues
 Year-over-year reduction in shipments of coal
Company Overview

Source: Union Pacific 2012 10-K

Business Risk Analysis
SWOT Analysis

Strengths Weaknesses
- Excess cash reserves can - Largely unionized workforce
allow UNP to upgrade fleet may lead to work stoppages
- Rail lines provide access to - Aging locomotive fleet
shale oil reserves
- Strong operational efficiency
Opportunities Threats
- Continued growth in oil - Keystone XL approval
shipments
- Upgrade fleet to be more - Economic downturn
fuel efficient
- Increased trade between US - Continual decline in coal
and Mexico shipments
Strategy
 Invest in network of rail and locomotives by
replacing existing equipment, in addition to
compliance with Positive Train Control (PTC)
 Increase the use of fuel surcharges to reduce
vulnerability to rising fuel costs
 More efficient locomotives
 Increased shareholder returns through additional
dividend raises and share repurchases

Source: Union Pacific 2012 10-K

Management Outlook
 Concern over decreased coal volume in 2013
 Concerns over agricultural volume in the first half
of 2013
 Long-term acceptance of the Keystone XL pipeline
 Additional investment in intermodal terminals
 Additional growth opportunities through trade with
Mexico
 Target of sub-65% operating ratio by 2017

Source: Union Pacific Barclay’s

Recent News
 New CEO named in March 2012:
 Previous CEO took a medical leave due to cancer
 2012 marked Union Pacific’s 150th year of
existence
 4Q 2012: record quarter profits in addition to most
profitable year in company’s history
 Record safety performance in 2012, despite a June
2012 collision of two Union Pacific trains in
Goodwell, Oklahoma, killing three

Source: Union Pacific Website News Releases

Recent Financial Information

Source: Union Pacific 2012 10-K, 2010 10-K

Recent Financial Information

Operating Ratio

Source: Union Pacific 3/5/13 Raymond James

Presentation
 Current Stock Information

Metric Value
Current Stock
Price $136.94

Trailing P/E
16.56

Forward P/E
14.58

Dividend
2.02%
Yield
Market Cap
($ millions) $64,142.7

Source: Capital IQ, Yahoo Finance

Financial Analysis
Liquidity Ratios
2008 2009 2010 2011 2012
Current Ratio 0.98 1.37 1.16 1.12 1.16
Quick Ratio 0.36 0.43 0.58 0.61 0.64
Cash Ratio 0.43 0.69 0.37 0.37 0.34

Profitability Ratios
2008 2009 2010 2011 2012
Operating Profit Margin 22.68% 23.98% 29.36% 29.27% 32.23%
Net Margin 13.01% 13.42% 16.39% 16.83% 18.84%
ROA 6.01% 4.62% 6.50% 7.47% 8.55%
ROE (Book Value) 15.07% 11.72% 16.02% 18.12% 20.51%

Solvency Ratios
2008 2009 2010 2011 2012
Debt/Assets 0.22 0.23 0.21 0.20 0.19
Debt/Equity 0.58 0.58 0.52 0.48 0.45
Interest Coverage 7.97 5.65 8.27 10.01 12.61
Financial Analysis
Activity Ratios
2008 2009 2010 2011 2012
A/R Turnover 29.31 22.45 18.34 15.13 15.32
Days Sales Outstanding 12.45 16.26 19.90 24.12 23.83
Fixed Asset Turnover 0.51 0.39 0.45 0.50 0.51
Total Asset Turnover 0.46 0.34 0.40 0.44 0.45

DuPont Analysis
2008 2009 2010 2011 2012
Tax Burden 65.60% 67.98% 63.48% 63.90% 63.49%
Interest Burden 87.46% 82.31% 87.91% 90.01% 92.07%
Operating Profit Margin 22.68% 23.98% 29.36% 29.27% 32.23%
Asset Turnover 45.24% 33.35% 39.37% 43.37% 44.38%
Leverage 2.57 2.50 2.43 2.43 2.37
ROE 15.14% 11.20% 15.65% 17.72% 19.84%
Comparable Companies

Revenue Market Cap Miles of Revenue/

Company
($ millions) ($ millions) Track Track Miles
Canadian National $9,788 $41,697 20,100 $486,970
Railway Company
Canadian Pacific $5,619 $21,644.6 14,400 $390,229
Railway Limited
CSX Corp. $11,756 $25,038 21,000 $559,809

Kansas City Southern $2,239 $11,876 6,300 $355,333

Norfolk Southern $11,040 $24,156 20,000 $552,000

Corp
Union Pacific $20,926 $66,170 31,868 $656,646
Corporation
Source: Capital IQ
Stock Performance

Source: Yahoo Finance

 Comparable Company Analysis

Ticker Symbol Price/Book Forward Forward

Target Company (Exchange) Value TEV/Sales TEV/EBITDA Forward P/E
Union Pacific Corporation UNP (NYSE) 3.40x 3.36x 8.00x 15.04

Comparable Companies
Canadian National Railway Company CNR (TSX) 3.90x 4.61x 9.90x 16.22
Canadian Pacific Railway Limited CP (TSX) 4.40x 4.25x 11.40x 20.35
CSX Corp. CSX (NYSE) 2.80x 2.81x 7.30x 13.69
Kansas City Southern KSU (NYSE) 3.90x 5.60x 13.90x 26.10
Norfolk Southern Corp. NSC (NYSE) 2.50x 2.85x 7.80x 13.82

Comparable Statistics
High 4.40x 5.60x 13.90x 26.10
Median 3.90x 4.25x 9.90x 16.22
Low 2.50x 2.81x 7.30x 13.69
Mean 3.50x 4.02x 10.06x 18.04

Source: Capital IQ
 Comparable Company Analysis

Implied UNP Share Price

Multiple Low Median High Mean
Price/Book Value $ 103.68 $ 161.73 $ 182.47 $ 145.15
Forward TEV/Sales $ 110.83 $ 178.63 $ 242.19 $ 167.99
Forward TEV/EBITDA $ 122.88 $ 174.30 $ 253.40 $ 177.46
Forward P/E $ 128.59 $ 152.35 $ 245.16 $ 169.41

Implied UNP
Multiple Weight Stock Price
Price/Book Value 30% $ 145.15
Forward TEV/Sales 30% $ 167.99
Forward TEV/EBITDA 15% $ 177.46
Forward P/E 25% $ 169.41
UNP Implied Stock Price $ 162.91

Source: Capital IQ
 Discount Rate
Annual Realized Returns
CAPM Year Actual
1 33.55%
2 13.93%
Risk-Free Rate 3.12% 3 29.44%
Market Risk Premium 6.00% 4 66.00%
5 -27.50%
5-Year Beta 0.74
Total Realized Return 137.03%

CAPM Cost of Equity 7.53% Arithmetic Annual Return 23.08%

Geometric Annual Return 18.84%
Discount Rate
Weighted Average Cost of Capital

Share Price $ 141.27

Shares Outstanding (millions) 468.40
Market Value of Equity $ 66,170.87

Debt 8,997.00

Percent Equity Weight 88.03%

Percent Debt Weight 11.97%

Cost of Debt 5.95%

Cost of Equity
CAPM Cost of Equity 7.53% 60.00% Cost of Equity
UNP Realized Return 18.84% 40.00% Weightings
Cost of Equity 12.05%

Tax Rate 38.0%

WACC 11.05%
DCF Analysis
Union Pacific Corporation Discounted Cash Flow Analysis ($ millions)

2013E 2014E 2015E 2016E 2017E Terminal Value

Net Income 4,671 5,483 6,149 7,057 8,152
Depreciation 1,869 1,836 1,924 2,014 1,925
Capital Expenditures (3,600) (3,700) (3,800) (3,500) (2,300)
Changes in Net Working Capital
Less Increases in A/R (101) (139) (138) (120) (19)
Less Increases in Inventories (104) (103) (79) (70) (93)
Plus Increases in A/P 418 451 481 468 434
Free Cash Flow 3,153 3,828 4,537 5,849 8,098 103,578
Present Value 2,839 3,104 3,312 3,846 4,794 61,322

Discount Rate 11.05%

Calculation of Implied Share Price Terminal Value

Implied Enterprise Value $ 79,218 Terminal Growth Rate 3.00%
Less Debt $ (8,997)
Plus Cash $ 1,063
Implied Market Cap $ 71,284

Implied Share Price $ 152.19

Decision Drivers
 Strengths
 Improved operating ratio and efficiency
 Short-term growth in oil transportation in addition to
longer-term growth in Mexico
 Management’s plan to return cash to shareholders
 GICS Diversification
 Concerns
 Sensitivity to approval of Keystone XL pipeline
 Declining demand for coal
Recommendation
 Valuation Summary
 Current Stock Price: $136.94 per share
 Comparable Companies Valuation: $162.91 per share
 DCF Valuation: $152.19 per share
 Recommendation: BUY
 Buy 100 shares at current market price
 100 shares at current market price = $13,694
Questions?