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Student Management Investment Fund
Industrials Sector
Kendrick Bernal – Sector Manager
Scott Nunez – Associate ManagerEduardo Madrid - AnalystMauricio Loschi - AnalystCarlos Telleria - AnalystFrank Brown – Analyst
I. Economic DataII. Industry OutlookIII. Company InformationIV. Company DriversV. Company AnalysisVI. Valuation AnalysisVII. SummaryTable of
Contents
Economic DataEconomic Data
GDP 3rd Quarter 2.2% Inflation Rate
0.2%Unemployment Rate
5.0%Corp Credit A 10yr Bond147bps
Commodity prices have been falling due to weak economic growth and demand in developed nations
Industry Outlook
Freight Outlook
12%
20%
29%
39%
How Freight Moves-Percent Mile-Ton
Water Pipeline Truck Rail
18%
15%
14%11%9%7%7%7%
6%6%
Top 10 Commodities by Value
Machinery Electronics Motorized VehiclesMixed Freight Pharmaceuticals MiscellaneousTextiles/Leather Gasoline Plastics/RubberBase Metal
Company Info.Company Information
Market Data
52-week high124.5252-week low 74.78Previous close 77.55Market Cap66.89BOutstanding Shares 854.1MBeta .93EPS (ttm)
5.79Trailing P/E Ratio 13.53Forward P/E 12.58
Catalysts
Simple Business ModelFavorable Long-term prospectsOperated by Honest and Experienced ManagementAvailable at a very attractive price
Eagle Materials [Ticker: UNP]Union Pacific Corporation, through its subsidiary, Union Pacific Railroad Company, operates railroads in the United States. The company offers freight transportation services for agricultural products, including grains, commodities produced from grains, and food and beverage products; automotive products, such as finished vehicles and automotive parts; and chemicals consisting of industrial chemicals, plastics, crude oil, liquid petroleum gases, fertilizers, soda ash, sodium products, and phosphorus rock and sulfur products. It also provides transportation services for coal and petroleum coke; industrial products comprising construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products; and intermodal import and export containers and trailers.
Union Pacific
Stock Performance
Company Overview
Key Highlights Steady growth Stable through downturns Well Diversified
2008
2009
2010
2011
2012
2013
2014
2015
E20
16E
$0
$2,000
$4,000
$6,000
$8,000
$10,000
Operating Income
17%
9%
16%
18%
20%
20%
Freight RevenueMix
Agricultural ProductsAutomotiveChemicalsCoalIndustrial ProductsIntermodal
$23 Billion 51%49%
West Coast Market Share by Revenue
UNPBNSF
Company Drivers
Railroad Network• Approximately 32,000 miles of rail
• Connections to all 6 major U.S.-Mexico gateways
• Connections to Canadian gateways
• Serves all major West Coast ports
S.W.O.T. AnalysisStrengths• Only railroad serving all major
Mexico gateways• Connection with Canada’s rail
systems• High barrier to entry• Experienced executives and board
members
Opportunities• West coast ports resuming
normal operations• 120 million common equity
share repurchase program.
Weaknesses• Government regulation• Reliability in capital markets• Environmental laws and
regulations
Threats• Demand could exceed network
capacity• Risk of liabilities from operations• Competition
Risks Transportation of hazardous materials Strikes or work stoppages Increase in fuel prices Reliability on technology
Insurance coverageAgreements with labor unionsFuel surcharges Improvements to and acquisition of new technologies
Key Risks
Risk Mitigation
Executive Directors
Name(age) Since/Started
Position
Lance M. Fritz (52) 2015/2000 Chairman, President, CEORobert M. Knight (57) 2004/1980 CFODiane K. Duren (55) 2012/1985 Executive Vice President, Corporate
SecretaryGayla L. Thal (58) 2010/2004 Senior Vice President, Law and General
CounselEric L. Butler (54) 2012/1986 Executive Vice President of Marketing and
salesCameron Scott 2014/1990 Executive Vice Presidents-Operations
Company Analysis
Liability Distribution1-Year Default FY
2013FY
2014FY
2015Probability 0.0216
%0.0095
%0.0357%
Risk IG5 IG4 IG6
2016 2017 2018 2019 2020 Thereafter$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Debt Maturity Distribution
Debt Maturity Normal Acquistion
2%
85%
9% 3%Debt Distribution
Term LoansSenior Bonds and NotesCapital LeasesGeneral/Other Borrowings
$1.7B in undrawn credit facilities
Growth Outlook
2011 2012 2013 2014 2015E 2016E0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Net Income Margin
2011 2012 2013 2014 2015E 2016E $- $5,000.00
$10,000.00 $15,000.00 $20,000.00 $25,000.00 $30,000.00
Freight Revenues (in millions of USD)
2011 2012 2013 2014 2015E 2016E $- $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00
EPS (Adj.)Operating GoalsImprove network operationsRenew track infrastructure and fleetImprove strong safety performanceAchieve solid core pricing gains
2010 2011 2012 2013 2014 LTM 2015Profitability
Gross Margin 42.4% 41.5% 44.4% 45.9% 48.3% 50.1%EBITDA Margin 38.4% 37.5% 40.6% 42.0% 44.4% 46.1%Net Income Margin 16.4% 16.8% 18.8% 20.0% 21.6% 22.3% Operating Ratio 70.6% 70.7% 67.8% 66.1% 63.5% 63.1%
Management Effectiveness Return on Assets 7.4% 8.1% 9.1% 9.6% 10.7% 10.0% Return on Equity 16.1% 18.1% 20.5% 21.4% 24.4% 24.1% Return on Capital 11.7% 13.1% 15.0% 15.6% 17.2% 15.9%
Balance Sheet Strength Debt to Equity 52.0% 47.9% 45.3% 45.1% 54.2% 64.7% Current Ratio 1.2x 1.1x 1.2x 1.1x 1.2x 1.1x
Fundamental Analysis
Increasing Margins
Increasing Returns
Consistent Balance Sheet Strength
Valuation Analysis
Comparable AnalysisNarrow Competitors
CSXNSCCP
CNR
Greater Returns Greater Financial Strength Greater Margins
Management Effectiveness
UNP Narrow Competitor
Broad Competitor
ROA 10.11% 7.75% 6.25%ROE 24.43% 21.35% 18.85%ROIC 11.65% 9.45% 7.09%Financial Strength UNP Narrow
CompetitorsBroad Competitor
EBITDA-CAPEX/ Interest Expense
11.93 5.60% n/a
Net Debt/ EBITDA 0.93 1.75 1.13Dividend Growth- 1yr
29.05% 7.97% -8.08%
Profitability Ratios
UNP Narrow Competitors
Broad Competitor
EBITDA Margin 44.43% 41.75% 18.90%Net Income Margin
21.59% 20.20% 5.39%
Revenue Growth 9.22% 7.85% 18.04%
Valuation
Buy
Current Price $77.55Target Price $98.00% Upside 26.4%
Average
ANR
DCF
P/TBV
EV/FCF
EV/EBIT
$25.00 $35.00 $45.00 $55.00 $65.00 $75.00 $85.00 $95.00 $105.00 $115.00 $125.00
Min to Median
Valuation Metrics UNP CSX NSC CP CNR
P/FCF 22.92 35.55 158.91 32.65 31.28P/E 14.86 13.33 15.80 18.52 17.83P/TBV 4.97 3.28 2.72 7.41 4.82EV/EBITDA 7.91 8.04 7.56
DCF AssumptionsGrowth Rate 3.13%WACC 6.50%
Undervalued
14Q4 14Q1 15Q2 15Q3 Current6
8
10
12
14
16
EV/EBITDA
UNP NSC CSX CP CNR
14Q4 14Q1 15Q2 15Q3 15Q4est0.00%
0.50%
1.00%
1.50%2.00%
2.50%
3.00%
3.50%
Dividend Yield
UNP NSC CSX CP CNR
• Cheap Stock• Strong Stock• Increasing Dividend• Experienced management-
120million share repurchase program
• Largest North American railroad by market cap
Summary
Summary
Simple Business Model Favorable Long-term prospects Operated by Honest and Experienced
Management Available at a very attractive price
Buy Current Price $77.55Target Price
$98.00% Upside 26.4% Catalyst
Consensus Rating:4.45
Buys: 75%Holds: 21%Sells: 3%
12M Tgt Px 26/31104.12Last Price
78.31Return Potential
33%LTM Return -32.5%