Union Pacific Corporation (NYSE:UNP) Junjie Zhang, Xuesong Leng, Dali Li Presented: April 12, 2018

Stock Market Prospects Agenda Recommendation Stock Market Prospects p Company Overview Business Analysis Macroeconomic Review Financial Analysis Financial Projection Valuation

Dividend: 0.73/Share Quarterly Transaction History of Portfolio Recommendation Hold Closing Price: 131.20 Dividend: 0.73/Share Quarterly Forward EPS: $6.32 Target Price: $134~$144 Transaction History of Portfolio Apr 18, 2013: Buy 100 @ $148.20 ($71.23) Jun 6, 2014 :2 for 1 split effective Apr 7, 2015: Sell 100 @ $108 Nov 9, 2015: Buy 100 @ $84.71 Return for Investors: 5-year Annualized Return: 17.9% 3-year Annualized Return: 8.8% Holding Return: 79.7%

Stock Market Prospects Portfolio Weight by Cost Portfolio Weight by Value

Company Overview Business Vision: Building America Founded Time 1862 Headquarter Omaha Number of Employees 41,992 Market Capitalization $101 Billion Business One of American’s leading transportation companies, operating Class I railroads Rail Network: More than 32,000 rail miles 23 states in the western 2/3 of the U.S. All major West Coast and Gulf Coast ports Connecting with Canada’s rail systems Serving the major gateways to Mexico UNP employ a variety of assets in the management and operation of our rail business. The rail network has more than 32,000 miles and covers 23 states in the western two-thirds of the U.S, including all major West Coast and Gulf Coast ports to eastern gateways as well as connects with Canada’s rail systems and serves the major gateways to Mexico. Freight traffic revenue is generated from six segments; Suppliers are consisted of two high horsepower locomotives providers; Freight traffic revenue is generated from six segments; Suppliers are consisted of two high horsepower locomotives providers;

Business Analysis Business Model 2017 Operating Expenses Total 13.2 Billion 2017 Total Revenue Total 21.1 Billion 2017 Freight Revenue Total 19.8 Billion Going more deeply into revenue The company’s diversified business mix includes Agricultural Products, Automotive, Chemicals, Coal, Industrial Products and Intermodal, which freight revenues of $19.8 billion in 2017. In 2018, the company consolidates its six major business units into four groups: Agricultural Products, Energy, Industrial and Premium, to align with evolving customer needs. The company is keep with the future of transportation demand by investing in upgrades to its infrastructure and equipment fleet.

Business Analysis Cyclical The cyclical nature of this industry makes it susceptible to macroeconomic changes.

Business Analysis Highly capital-intensive strategy Capital Expenditure Cash Flow Statement Operating Activities $7.2 B Investing Activities $-3.1 B Financing Activities $-4.1 B Total 3.2 Billion Meanwhile, railroad industry is highly capital-intensive and requires infrastructural developments and network upgrades from time to time. The company is keep with the future of transportation demand by investing in upgrades to its infrastructure and equipment fleet. With a 57% invest in build and maintainence of track, and 19% invest in locomotives purchase and maintainece. Moving to cash flow statement, the 7.2billion generated by normal operating activitites, and -3.1 billion with a large portion invest in capex, and 4.1b outflow with a huge portion used by share repurchase.

Executive Profile Lance M. Fritz Chairman, President and Chief Executive Officer Fritz became chairman of the board effective October 1, 2015. Fritz became president and chief executive officer February 5, 2015, when he also was elected to the corporation’s board of directors. Fritz is a member of the board of directors for the Association of American Railroads. He also serves on the U.S. Chamber of Commerce board and executive committee. He is a member of the Business Roundtable, the STRATCOM Consultation Committee and the Georgia Institute of Technology President’s Advisory Board. Rhonda S. Ferguson  Executive Vice President, Chief Legal Officer and Corporate Secretary Prior to joining Union Pacific in 2016, Ferguson was FirstEnergy Corp. vice president, corporate secretary and chief ethics officer where she led teams responsible for corporate, real estate and compliance initiatives since 2007. Ferguson previously served as assistant general counsel and assistant secretary with Ferro Corporation. She also served as a partner with Baker Hostetler LLP law firm and began her career with Thompson Hine Robert M. Knight, Jr. Executive Vice President and Chief Financial Officer In 2014, Knight was ranked No. 2 on the Wall Street Journal’s list of the Top Performing CFO’s in the S&P 500. He was named as No. 1 CFO in the Airfreight and Surface Transportation sector in the Institutional Investor 2014, 2015, 2016, 2017 and 2018 rankings. Knight is a member of the Grupo Ferroviario Mexicano and TTX Company boards of directors. Here is the executive profile of the company. What we want to point out is the CFO, Robert Knight, in 2014, was ranked No.2 on the Wall street journal’s list of the top performance CFO’s in the S&P 500. And ranked No.1 CFO in the Airfreight and surface transportation section in the institutional investor from 2014 to 2017. Cameron Scott Executive Vice President and Chief Operating Officer Cameron Scott has served as executive vice president and chief operating officer since February. Scott joined the railroad in 1990 as a management trainee in Operating, and subsequently held many positions including Superintendent of the Utah, North Platte and Kansas City Service Units.

Management Plan - 2018 Operation: Capital Expenditures: To align resources with customer demand, maintain an efficient network, and ensure surge capability of assets. To continue the momentum of volume pricing and productivity initiatives. Productivity: Targeted 60% operating ratio by 2019. Pricing: Take along with pricing and yielding price above inflation. Capital Expenditures: Total $3.3 Billion, including $2 Billion of replacement of track & $0.16 billion of Positive Train Control. Longer term, expected capital expenditures: 15% of revenue. Dividend and Share Repurchase: Dividend Payout Ratio guidance: 40% ~ 45% Share Repurchase Program: Jan 2017 ~ Dec 2020: 120 million shares (35 million shares done in 2017).

Agricultural Products Agricultural Products Management Plan - 2018 Change of Business Mix Union Pacific announced that it is redesigning its Marketing & Sales organization to align with evolving customer needs. Business Mix Agricultural Products Automotive Chemical Coal Industrial Products Intermodal Business Mix Premium Agricultural Products Energy Industrial Products

Railroad Industry Overview Important leading indicator of domestic economy generally. Cyclical, susceptible to macroeconomic changes. Seasonal, subject to the nature of the commodity Highly capital-intensive Competition varies widely from motor carriers, barge operators, ship and air transporters, depending on the route and freight category. The Railroad Industry is taken as an important leading indicator of domestic economy generally. The cyclical nature of this industry makes it susceptible to macroeconomic changes. The domestic economy is expected to stay strong this year and next. Thus, the railroad industry may continue to enjoy positive returns. The main products transported by this industry is commodity, subject to the characteristics of seasonality. E.g. the volume of agricultural products increase from summer to fall. Cold weather increases the volume of coal. Meanwhile, railroad industry is highly capital-intensive and requires infrastructural developments and network upgrades from time to time.

Railroad Industry Overview Main Players of North America Burlington Northern Santa Fe (BNSF) (Berkshire Hathaway company) Union Pacific (NYSE:UNP) CSX (NASDAQ: CSX) Norfolk Southern (NYSE:NSC) Canadian National (NYSE:CNI) Canadian Pacific (NYSE:CP) Kansas City Southern (NYSE:KSU) Within North America, the industry is dominated by several big operators, including Burlington Northern Santa Fe (BNSF), Union Pacific, CSX, Norfolk Southern, Canadian National, Canadian Pacific and Kansas City Southern. Directly competing with UNP, BNSF, which was taken over by Berkshire Hathaway in 2010, also operates Class I railroads in the western two-thirds of the U.S. Main railroads of UNP and BNSF are parallel from west to east, however, they have quite distance with each other, it is hard for customers to change railway server in consideration of cost.

Comparable Companies Revenue Profit Current Price ROE ROA LD/A EV/Sales EV/EBITDA P/E P/B Operating Ratio Union Pacific (NYSE:UNP) $21,240M $10,712M $131.2 47.8% 9.0% 29.4% 5.5x 11.4x 23.7x 4.1x 62% CSX (NASDAQ: CSX) $11,408M $54,710M $55.0 41.4% 6.8% 33.0% 5.3x 11.3x 28.3x 3.3x 66% Norfolk Southern (NYSE:NSC) $10,551M $5,404M $131.1 37.6% 6.3% 28.3% 4.5x 10.3x 22.8x 2.2x Canadian National (TSX:CNR) C$13,041M C$5,484M C$94.3 34.8% 9.3% 28.8% 6.2x 11.8x 20.3x 4.2x 57% Canadian Pacific (TSX:CP) C$6,554M C$2,405M C$178.4 43.5% 8.7% 40.8% 12.1x 18.7x 5.0x 58% Kansas City Southern (NYSE:KSU) $2,583M $962M $109.4 20.8% 6.4% 28.5% 20.7x 2.8x 64%

Macroeconomics Factors Influence Positive Domestic Economic Growth Increasing Volume (construction materials, lumber, plastics, domestic auto products, etc.) Tax Reform Total effective income tax rate will reduce from 39% to about 25% (including both federal and state tax) Additional cash from operations in 2018 of approximately $1 billion. Trade War (China imposes tariffs on agricultural and automotive products) imported from U.S. Deceasing the volume of agricultural products, automotive products and intermodal. Energy Price Fluctuating, small influence Interest Rate and Inflation Increasing costs, including interest expense . The domestic economy is expected to stay strong this year and next. Thus, the railroad industry may continue to enjoy positive returns. The tax reform decreases the total effective tax rate of the company from 39% to 25%, including both federal and state tax. The company will general additional cash of 1 B in 2018 due to tax reform. Also, tax reform also booms the domestic economy. However, the unease with a potential trade war or other trade policy may result in industrial underperformance, especially the business of agricultural products, auto product and intermodal. The business of UNP also subjects to the influence of energy price. If the energy price goes up, the fuel cost will go up, but the transportation of ?? Will also go up. This energy price has two-way effect on the company. Also we believe the energy price will be fluctuating this year. Thus, this there will be small influence on UNP. In addition, railroads’ ability to get price increase above inflation will be crucial to drive operating ratios lower in 2018, due to the expected higher inflation rate.

Porter Five Forces Very high entry barrier in terms of capital intensive nature, sophistication of operation, regulation, etc. Very few new entrants . “Big Six” enjoy most of the market share. Different operating areas. Duopolies (UNP & BNSF) of Mid-west America. Main railroads of UNP & BNSF are parallel, but not close with each other. Buyers can switch to the service of other railroad companies or substitutes if the price of UNP is too high. Truckers, barge operators, and air transporters, etc. Railroad is the most economic and convenient transportation method. Only two horsepower locomotive suppliers, there is big risk for UNP if any one stops its service.

SWOT Analysis Strengths Weaknesses Threats Opportunities Economic Moat Largest train network Low operation ratio Solid and stable financial performance Big customer base and strong customer stickiness Increasing pricing power Weaknesses Cyclical and seasonal business Highly capital-intensive Increasing debt ratio Opportunities Positive Domestic Economy (e.g. high demand for construction materials) Tax Reform Less competition Threats Competition from BNSF Potential Trade War Interest Rate & Inflation Fuel Price Less mining of coal Oil pipelines Policy risks (regulations on railroad industry, environmental protection regulations, trade policies, etc.)

Financial Analysis UNP Operating Ratio UNP EBITDA

Financial Analysis UNP EPS UNP Solvency Ratios

Financial Analysis DuPont Analysis 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Tax Burden 61.7% 64.0% 63.6% 62.7% 62.5% 62.4% 62.3% 62.1% 62.6% 140.4% Interest Burden 86.2% 87.7% 83.2% 88.0% 90.2% 92.2% 93.1% 93.7% 92.5% 90.7% 91.4% Profit Margin 21.4% 23.2% 25.3% 29.7% 29.8% 32.8% 34.5% 37.1% 38.0% 37.4% 39.3% Asset Turnover 0.4 0.5 Leverage Ratio 2.4 2.5 2.6 2.7 ROE 12.0% 15.1% 11.1% 16.1% 18.0% 20.4% 21.3% 24.2% 22.3% 20.5%

Financial Projection Base Case Assumptions Bear Case Assumptions Based on management forecast Pricing: Increasing pricing above inflation. Volume: Small increase in agricultural products, autos, international intermodal, energy products Big increase in auto parts and domestic intermodal, industrial products Cost: Fluctuating fuel price, less influence Bear Case Assumptions Based on our analysis and forecast Big decrease in agricultural, automotive products and international intermodal. (Trade war, referring to the influence of EPA regulations on coal in 2015, reducing the volume of coal by 17%, revenue by 20%.) Expected small increase in coal, but big decrease in coal exports. Downside risk of domestic economy. Increasing cost of labor force & fuel prices. Base Case Assumption Bear Case Assumption

Base Case Bear Case

Management improves efficiency to generate higher profit margin Management cuts cost to maintain healthy profit margin

Discounted Cash Flow - Base

Discounted Cash Flow - Bear

Target Share Price Range: $134-$144 Valuation $120 $130 $140 $150 $160 $170 DCF Analysis Comparable Companies 11.4x 2018E EBITDA – 20.7x 2018E EPS $100 $110 Bear Case – Base Case Target Share Price Range: $134-$144

Recommendation Main Takeaways Business with economic moat Bear Case Base Case Main Takeaways $144 Business with economic moat Solid and stable operation & financial performance Experienced management team Positive domestic economy Period of growth of cycle $116 HOLD