23 June 2014

Union Pacific - Choo Choo Train, Ran Away

[Source: Union Pacific]

When Berkshire Hathaway swallowed up BNSF Railway, it also disposed all its shares in Union Pacific that it had previously held. The reason for doing so didn't seem to be a case of negative views on Union Pacific, but rather, to avoid complications over anti-monopolistic concerns from regulatory bodies arising from Berkshire owning two big railway companies. The rail business seem to be experiencing a boom of late.

Can't buy BNSF, but Union Pacific is certainly available. So I looked at its financials.

Its debt levels seems low at the 40-50% bracket, compared to most US companies.

Dividend yield isn't yet great at below 2% with a payout ratio of 32.35%. But its DPS has been growing steadily year on year. In fact, its DPS has more than doubled over the last 5 years. In addition, its DPS has remained significantly below its EPS each year. Looks like it has a lot of room to continue on this trajectory of DPS growth.

Margins look great with gross margin at 73.47% and net profit margin at 20.25%. Which suggests that this is a very profitable business. PE ratio may be a bit on the high side though.

My previous impression was that the rail business is a capital intensive business. Seems like that doesn't detract from its profitability. I was probably influenced by the situation faced by our very own SMRT. After years of being seen as a great defensive dividend stock, all it took was one wonderful massive train breakdown incident and voila, end of party. It went south rapidly and stayed that way for much of recent years.

Rails are sticky business. It's difficult for new entrants to come in. One has to lay lots of line to create the network and invest in a lot of assets (trains, switching systems) to get going. I don't think there will be any new competition anytime soon in the US. For a large country like the US, rails make more sense than airlines and shipping lines to move large volumes of goods around. Airlines can move stuff fast, but they are notoriously difficult to make the margins and can't carry much. Ships need a lot of upkeeping and fuel, and can't reach land-locked areas. Rails appear to have that significant niche.

Ratios & Other data
ROA (%) 4.62 6.52 7.47 8.55 9.06
ROE (%) 11.72 16.09 18.12 20.51 21.35
DPS (USD) 0.5400 0.6550 0.9650 1.2450 1.4300
EPS (USD) 1.8683 2.7640 3.3606 4.1375 4.7102
[Source: POEMS, as at 12 Jun 2014.]

Looks like a great buy right? So I did. A couple of days later, I discovered to my horror that the value of the shares I had bought had dropped to half the price I paid! Holly crap. What happened? 

A couple of frantic checks later, I realised that it had undergone a 2-for-1 split, effective the day I bought the shares. Such coincidence! I hadn't thought to check if there were any news on such things then. A couple of frantic e-mails with the online broker, it was subsequently ascertained that I had indeed been credited with the split shares. So it was all good in the end. I had not stupidly paid double the value for my Union Pacific shares. Phew. Bodoh bodoh.

Lesson learnt: Check for news of stock split, merge and dividend ex-dates before diving into a buy.

Choo choo! She'll be coming round the mountain when she comes ...

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