1. Union Pacific Corp. Investment Research
Tang, Nianfan
Tian, Haoyun
Wang, Yibing
Investment Managers, RCMP
November 15, 2018

2. Agenda Introduction Stock Market Prospects
Macroeconomic factors and Industry Overview
Company Overview
Financial Analysis
Financial Projections
Valuations
Recommendation

3. Stock Market’s Prospect
Union Pacific Corporation
Current Share Price (11/13/18) $
Market Capacity
$ B
52 Week Range $
P/E (TTM)
9.77
EPS (TTM)
$ 15.22
Trailing Annual Dividend & Yield
$ 2.92 (1.98%)
Portfolio Weight by Cost
Portfolio Weight by Value
Source: Yahoo Finance

4. Company Overview
Union Pacific Corporation (NYSE:UNP) is one of America's leading transportation companies. Its principal operating company, Union Pacific Railroad, is North America's premier railroad franchise.
Fast Facts About UPR
Founded in 1862
Has the largest railroad network of 32,122 route miles
Covering 23 states across the western 2/3 of the United States
The only railroad serving all six major Mexico gateways
8,573 locomotives and 64,191 freight cars
42,000 employees
10,000 customers
Source: UNP Annual Report, UNP official website

5. Key Macroeconomic Drivers
Source: Board of Governors of the Federal Reserve System (US)
Source: IBISWorld
Source: Energy Information Administration
Source:

6. Key Macroeconomic DriversX
Trains use diesel as fuel.
Operating expense X
Fuel is one of the Rail Transportation industry’s primary cost.
Industry revenue X
Fuel surcharges are used by operators to limit the effects of volatile increases in fuel costs and to pass risk to customers.
Oil Price Decreases
1. Fuel Surcharges X
The fuel surcharges are part of revenue. X
Coal is one of the industry’s largest commodity group
2. Freight Volume of Coal
The demand for coal would decrease because it is a kind of substitute for oil. X X
Trains would become a less cost-effective shipment option.
3. Demand of Services X
The demand for rail transportation industry services would decrease.
The oil price has big influences on industry revenue.

7. Industry Overview Supply Industries Demand Industries
Petroleum Refining
Rail Maintenance Services
Train, Subway & Transit Car Manufacturing
Demand Industries
Agriculture, Forestry, Fishing and Hunting
Mining
Coal Ming
Manufacturing
Petrochemical Manufacturing
Car & Automobile Manufacturing
Coal & Natural Gas Power
Source: IBISWorld
U.S. Total Carload & Intermodal Originated Rail Traffic
Source: Association of American Railroads 
Source: United States Department of Transportation 

8. Industry Overview Freight Commodity Statistics
Downward trends of the freight volume of Crude Petroleum and Coal from 2015.
Mainly due to the sharp decrease of crude oil price.
Source: Association of American Railroads 

9. Industry Overview Competition
Different Operating Areas
Different Revenue Mix
Highly concentrated: the top four players account for 85.6% of revenue
Source: IBISWorld
Source: Association of American Railroads 

10. Porter’s Five Forces Threat of New Entrants Threat of New Entrants Low
Very High level of capital intensity
Very High entry barrier
Very Few new entrants
Threat of New Entrants
Low
Bargaining Power of Buyers
Customers can easily switch to other railroad transportation companies or substitutes if the price is too high.
Facing competition with respect to price, transit times, quality and reliability of service from substitutes and other railroads.
Rivalry Among Existing Competitors
Highly-concentrated and maintained market share
Operating in different areas
Supplier Power
Medium
Buyer Power
Medium
Rivalry
Low
Threat of Substitutes
Motor carrier, ships, barge operators, pipelines and air transportation, etc.
Railroad is the most cost-effective and quick way to transport bulk freight over large distances.
Bargaining Power of Suppliers
Only two key domestic suppliers of high horsepower locomotives
If any one discontinues operations, companies would experience significant cost and risk increase.
Threat of Substitutes
Medium
Source: UNP Annual Report, IBISWorld US

11. Industry Dynamics Positive Positive Neutural Neutural Negative
Save $ 6b and strongly boost UP’s financial performance, setting a all-time high of EPS
Positive
As the only railroad serving all 6 gateways to Mexico, UP deserves better prospect
Neutural
Agriculture, Industrial (Plastics) and Intermodal volume grow
Concerns on Energy(Coal) and Autos
Neutural
Competitors(CSX and CP) has greatly improved operating ratio
UP starts imitating them to optimize its efficiency
Negative
Uncertainty of Asian trade, especially on intermodals
If agreement could be made, volume will increase with expected higher US exports
Tax Cuts and Job Act, 2017
New NAFTA
Economic growth
Hunter Harrison’s Precision Scheduled Railroading Plan
CHINA-US Trade War

12. Business Analysis
Total Revenue was $21.24 billion in 2017 consisting of 93% of Freight Revenue.
Freight revenue : freight moves from origin to destination, generated from six commodity groups, Industrial, Agricultural, Chemical, Coal, Automotive and Intermodal.
No cost of goods sold.
Operating income = Revenue– Operating expense.
Freight Revenue in 2017
Freight Revenue in 2017
Source: UNP Annual Report, Bloomberg

13. Revenue and Revenue Ton Mile
Important indicator specific to rail industry: Revenue ton-miles = weight of goods * miles.
Eg: 40 tons of goods *30 miles= 120 Revenue ton-miles
Freight Revenue (in mm)
Revenue = P* Q
Q: Revenue ton miles
P: Freight Revenue /Revenue Ton Miles, keeps almost same from 2014 to 2016.
Revenue Ton Miles(in mm)
Freight Revenue /Revenue Ton Miles
Source: UNP Annual Report, Bloomberg, Energy Information Agency

14. Revenue and Revenue Ton Mile
Another indicator used to reflect “Q”: Carloads/Volume.
Similar past trend in carload and revenue ton-mile.
Main contributors to jump in revenue in 2015 & 2016:coal and industrial products.
Factors influence coal group: low natural gas (substitute of coal) price.
Factors influence industrial group: energy price, drilling activity, shipment of steel and frac sand.
Carloads
Growth rate of carloads in different units
Brent Crude Oil Price
Source: UNP Annual Report, Bloomberg, Daily FX

15. Freight Revenue Breakdown
Revenue Analysis
Percent of revenue generating from coal unit kept decreasing from 23% to 13%.
Highly correlated to the oil price
Freight Revenue Breakdown
Crude Oil Price
Source: UNP Annual Report, Bloomberg, Energy Information Agency

16. Operating Expenses Analysis
Operating ratio = Operating expense/ Revenue.
Declining operating ratio.
Also has high correlation with energy price.
Management plan: reduce operating ratio to 60% in 2020.
Operating Expense (in mm)
Growth rate of operating expense
Operating Ratio
Source: UNP Annual Report, Bloomberg

17. Operating Expenses Analysis
Compensation and benefits accounts for more than 1/3.
Layoff in the past did not reduce compensation and benefits effectively.
Management plan: job cuts in 2018.
Our projection: job cuts may not result in decrease of operating ratio immediately.
Number of Employees
Operating Expense Breakdown
Operating Expenses: Compensation and benefits
Source: UNP Annual Report, Bloomberg

18. Operating Expenses Analysis
Locomotives: a powered rail vehicle used for pulling trains.
Freight Cares: trains carrying goods.
Negative growth rate in Equipment and other rents since 2014.
Higher percent of owned trains.
Freight Cars
Locomotives
Operating Expense: Equipment and other rents
Source: UNP Annual Report, Bloomberg

19. Profitability Analysis
Representative Figure
ROA&ROE
2008
2014
2017
ROE
15.07%
24.43%
20.71%
ROA
6.01%
10.15%
8.17%
Operating Margin
22.68%
36.49%
37.95%
Net Income Margin
13.01%
21.59%
21.83%
Asset Turnover & Leverage Ratio
Margins
Source: UNP Annual Report, Bloomberg

20. Profitability Analysis
Net Income
Basic EPS over $4 since 2012.
Continuous growth in dividends.
Basic EPS
Dividends
Source: UNP Annual Report, Bloomberg

21. Benchmark Analysis Revenue(in mm) Net Income(in mm) Revenue GAGR(5y)
Net Income Margin
Market Cap
ROA
ROE
Union Pacific Corp.
21,240
10,712
1.66%
26.6%
50.4% B
9.0%
47.8%
CSX Corp.
11,408
5,471
-0.67%
24.2%
48.0%
58.42 B
6.8%
41.4%
Norfolk Southern Corp.
10,551
5,404
-1.14%
23.0%
51.2%
45.91B
6.3%
37.6%
Canadian National Railway
13,041
5,484
7.63%
17.4%
42.1%
61.83 B
9.3%
34.8%
Canadian Pacific Railway Ltd
6,554
2,405
4.83%
33.4%
36.7%
29.33 B
8.7%
43.5%
Kanas City Southern
2,583
962
4.24%
23.8%
37.2%
10.51 B
6.4%
20.8%
Source: UNP Annual Report, Bloomberg，Yahoo Finance

22. Benchmark Analysis
“Tax Act” in Dec.2017 enabled net income increase for all companies.
Economies of scale
The larger the size, the higher the profitability ratio.
ROA
Rank
Size
ROA
ROE
Net income margin
Union Pacific Corp. 1 2
Canadian National Railway 3 4
CSX Corp.
Northfolk Southern Corp. 6
Canadian Pacific Railway Ltd 5
Kanas City Southern
Net Income Margin
ROE
Source: UNP Annual Report, Bloomberg

23. S W O T SWOT Analysis Strengths Weaknesses Opportunities Threats
Duopoly in Western Area
Diversified Business mix
Largest Railroad Network
Solid Customer Base
The Only Railroad Serving All Six Major Mexico Gateways
Weaknesses
Cyclical
Influenced by Oil Price S W O T
Opportunities
New Tech to Improve Transportation Efficiency
Positive Domestic Economy
Upward Trend of Intermodal
Trade talk with Mexico
Threats
Decreasing Coal Freight Volume
Competition from BNSF & Substitutes
High Volatility of Oil Price
Policy & Regulation Risks
Potential Trade War

24. Management Plan Announced Plans Actions Taking
Unified 2020: Set goal of 60% operating ratio
Share Buyback: AVG 30m shares per year since 2014, ASR 36m of price $ 140 in June 2018, AVG 10m during
Dividend: 119 consecutive years, record high, target 40% payout ratio
Consolidate 3 operating regions to 2
Reduce operating service units from 17 down to 12
Since August, 625 locomotives are removed and another 150 will be taken out this year
Workforce volume will go down, estimated 500 job cuts in 2018
ASR
Sources: 10-K, 2017; 3Q UNP 2018 Earning report, 3Q UNP investor’s conference call

25. Financial Projection - Base
In Millions of USD except Per Share
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018 Est
FY 2019 Est
FY 2020 Est
FY 2021 Est
FY 2022 Est
FY 2023 Est
12 Months Ending
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
12/31/2021
12/31/2022
12/31/2023
Revenue
21,963.0
23,988.0
21,813.0
19,941.0
21,240.0
22,871.8
24,244.1
25,213.9
25,970.3
26,489.7
27,019.5
% growth
9.2%
-9.1%
-8.6%
6.5%
7.7% 6% 4% 3% 2%
Agricultural
Energy
Industrial
Premium
other
- Operating Expenses
14,517.0
15,235.0
13,761.0
12,669.0
13,392.8
14,397.8
15,031.3
15,380.5
15,582.2
15,893.8
16,211.7
4.9%
-9.7%
-7.9%
5.7%
7.5%
4.4%
2.3%
1.3%
2.0%
Compensation and Benefits
5,161.0
4,750.0
4,984.0
5,358.0
5,593.8
5,723.7
5,798.7
5,914.7
6,033.0
Purchased services and materials
2,421.0
2,256.0
2,363.0
2,540.3
2,652.1
2,713.7
2,749.3
2,804.3
2,860.4
Depreciation
2,012.0
2,038.0
2,105.0
2,263.0
2,362.5
2,417.4
2,449.1
2,498.1
2,548.0
Fuel
2,013.0
1,489.0
1,891.0
2,032.9
2,122.3
2,171.6
2,200.1
2,244.1
2,289.0
Equipment and other rents
1,230.0
1,137.0
888.0
954.6
996.6
1,019.8
1,033.2
1,053.8
1,074.9
Other
924.0
997.0
948.0
1,019.1
1,064.0
1,088.7
1,103.0
1,125.0
1,147.5
Operating ratio
66%
64%
63%
62%
61%
60%
EBIT
7,446.0
8,753.0
8,052.0
7,272.0
7,847.2
8,474.0
9,334.0
10,279.5
10,587.9
11,069.6
11,291.0
- Interest Expense
526.0
561.0
622.0
698.0
719.0
831.4
786.0
1,045.8
947.6
632.3
900.0
Income before tax
6,920.0
8,192.0
7,430.0
6,574.0
7,128.2
7,642.6
8,548.0
9,233.7
9,640.3
10,437.3
10,391.0
- Tax Expense
2,629.6
3,113.0
2,823.4
2,708.7
2,904.2
1,966.0
2,123.8
2,217.3
2,400.6
2,389.9
Net Income, Adjusted
4,290.4
5,079.0
4,606.6
4,075.9
4,419.5
4,738.4
6,581.9
7,110.0
7,423.0
8,036.7
8,001.1
Net Margin
20%
21%
27%
28%
29%
30%
Diluted Weighted Avg Shares
931.5
901.1
869.4
835.4
798.4
732.0
720.0
710.0
700.0
690.0
Diluted EPS, Adjusted
4.61
5.64
5.30
4.88
5.54
6.47
9.14
9.87
10.45
11.48
11.60
Reference Items
Dividends per Share
1.48
1.91
2.20
2.26
2.48
3.06
3.36
4.06
4.68
4.80
5.28
Total Cash Common Dividends
1,378.6
1,721.1
1,912.7
1,883.8
1,980.0
2,239.9
2,419.2
2,923.2
3,322.8
3,360.0
3,643.2
Dividend paypout ratio
32.1%
33.9%
41.5%
46.2%
44.8%
47.3%
36.8%
41.1%
41.8%
45.5%
ROA
8.6%
9.7%
8.4%
7.3%
7.6%
8.1%
10.8%
11.2%
11.3%
11.7%
ROE
20.2%
24.0%
22.3%
20.4%
17.8%
23.3%
28.0%
26.6%
24.9%
21.7%
DEBT/EBITDA
1.0
1.1
1.4
1.6
1.7
2.1
1.8
1.5
1.3
EBITDA/Interest Expense
17.5
19.0
16.2
13.3
13.8
12.8
14.8
12.1
13.7
21.5
15.4
Depreciation Expense
1,777.0
1,904.0
2,204.2
2,283.2
2,362.2
2,441.2
2,520.2
2,599.2

26. Discounted Cash Flow Analysis
Upside
Management
Base
Downside 1
Downside 2
% Revenue growth
Operating ratio reach
60% in 2020
60% in 2021
60% in 2022
Discount rate
7.9%
Exit EBITDA Multiple
12x
11.5x
Implied perpetuity growth
3.4%
3.3%
Valuation
170.9
157.1
146.86
127.05
121.4
WACC
Target Capital Structure
Debt-to-Total Capitalization
17%
Equity-to-Total Capitalization
83%
Cost of Debt
Cost-of-Debt
5.0%
Tax Rate
25.0%
After-tax Cost of Debt
3.8%
Cost of Equity
Risk-free Rate (1)
3.4%
Market Risk Premium (2)
5.5%
Levered Beta
0.98
8.8%
WACC
7.9%
WACC Assumptions
Cost of Debt: Select 5% based on YOY increasing effective interest rate by larger debt amount and indicated higher interest rate in the future(4.7% in 2017)
Tax Rate: Include both Federal and State’s
Risk-Free Rate: 30-year US Treasury Bond, Oct 2018
MRP: US equity market premium by KPMG, June 2018
Equity Beta: Select 0.98 from Bloomberg
We select WACC as discount rate for no obvious business risk premium

27. Comparable Company Analysis
Comparable Companies Analysis - As of 11/9/2018
Company Name
Enterprise Value ($b)
Market Capitalization ($b)
Share Price ($)
EPS (ttm, $)
P/E (ttm)
P/S (ttm)
EV/Revenue
EV/EBITDA
CSX Corporation (NasdaqGS:CSX)
68.93
59.67
70.66
7.53
9.39
4.98
5.76
11.55
Norfolk Southern Corporation (NYSE:NSC)
53.45
46.39
170.32
19.99
8.52
4.23
4.88
10.91
Kansas City Southern (NYSE:KSU)
13.43
10.42
102.42
9.91
10.33
3.89
5.01
10.35
Canadian Pacific Railway Limited (NYSE:CP)
34.42
29.68
208.73
12.46
16.75
5.62
6.52
12.63
Canadian National Railway Company (NYSE:CNI)
69.03
62.30
85.72
5.66
15.15
6.22
6.89
13.61
Lowest
Mean
47.85
41.69
127.57
11.11
12.03
4.99
5.81
11.81
Median
Highest
Union Pacific Corporation (NYSE:UNP)
127.55
110.7
150.25
14.43
10.41
5.03
5.80
12.09
Comparing to Mean
>
< =
UNP Valuation - Using Mean Multiples of COMPS
Multiple
Share Price ($)
P/E (ttm) (1)
135.86
P/S (ttm)
149.00
EV/Revenue
150.61
EV/EBITDA
146.24
Range
Current Share Price (as of 11/9/2018)
150
Note: (1) using the mean of CSX, NSC, and KSU
Sources: Yahoo Finance, Companies Financial Reports

28. Dividend Discount Model Analysis
Cost of Equity
Risk-free Rate (1)
3.4%
Market Risk Premium (2)
5.5%
Equity Beta (3)
0.98
8.8%
CAGR of Dividends
16.4%
LT-growth rate
6.0%
Projected Dividend Per Share ($)
PV(Dividend Per Share) ($)
2018E
3.06
3.02
2019E
3.36
3.05
2020E
4.06
3.39
2021E
4.68
3.59
2022E
4.80
3.38
2023E
5.28
3.42
Terminal Value
201.18
130.47
Sum of PV(Dividend Per Share) =Share Price
$150.34
Current Share Price (As of 11/13/2018)
$148.6
(1) 30-year US Treasury Bond, Oct 2018, sourced from Bloomberg
(2) Sourced from KPMG, June 2018
(3) Sourced from Bloomberg
Sources: Bloomberg, Dividends are adjusted for stock split.
Sensitivity Test
Cost of Equity
$150.34
7.3%
7.8%
8.3%
8.8%
9.3%
LT-growth Rate
5.25%
209.1
168.3
141.8
121.9
106.9
5.50%
235.8
184.8
153.1
129.9
112.9
5.75%
271.1
205.3
166.6
139.3
119.7
6.00%
320.0
231.5
183.0
150.3
127.6
6.25%
392.2
266.1
203.5
163.6
136.8
6.50%
509.4
314.1
229.8
179.7
147.7
6.75%
733.3
384.8
264.6
199.8
160.6

29. Final Recommendation: Hold
Summary $ $
Valuation Range: $ 140 – 160, Current Price: $ as of 11/13
Total Shareholder’s Return: EPS of $11.6 in ’23 equate to a $ stock at 18-20x,
40% - 45% upside, 9.32% - 10% IRR
Final Recommendation: Hold

30. Appendix – Comps Benchmark
Company Name
Enterprise Value ($b)
Market Capitalization ($b)
Share Price ($)
EPS (ttm, $)
D/Total MKT Cap
Operating Ratio(3Q)
LTM EBIT, 1 Yr Growth %
LTM Net Income, 1 Yr Growth %
LTM Total Debt/Capital %
LTM Total Debt/EBITDA
LTM EBITDA Margin %
LTM EBIT Margin %
LTM Net Income Margin %
LTM Total Revenues, 1 Yr Growth %
CSX Corporation (NasdaqGS:CSX)
68.93
59.67
70.66
7.53
17.3%
58.7%
23.9%
269.3%
50.1%
2.30
49.9%
38.8%
55.2%
3.4%
Norfolk Southern Corporation (NYSE:NSC)
53.45
46.39
170.32
19.99
18.1%
65.4%
18.9%
217.6%
37.5%
2.00
44.7%
34.9%
52.4%
7.1%
Kansas City Southern (NYSE:KSU)
13.43
10.42
102.42
9.91
20.4%
62.0%
7.6%
88.6%
34.6%
2.10
48.4%
35.8%
38.0%
6.3%
Canadian Pacific Railway Limited (NYSE:CP)
34.42
29.68
208.73
12.46
22.4%
58.3%
10.8%
32.4%
53.8%
51.6%
42.7%
34.0%
8.4%
Canadian National Railway Company (NYSE:CNI)
69.03
62.30
85.72
5.66
16.4%
59.5%
-2.5%
43.9%
40.6%
1.80
50.6%
41.0%
42.2%
4.4%
AVG
47.85
41.69
127.57
11.11
60.8%
11.7%
130.4%
43.3%
49.0%
38.6%
44.3%
5.9%
Union Pacific Corporation (NYSE: UNP)
127.50
190.00
150.00
12.21
17.0%
63.5%
8.9%
150.1%
53.4%
2.20
47.9%
38.2%
51.3%
6.2%
Train Speed
Dwell Time
CSX Corporation (NasdaqGS:CSX)
17.9 9
Norfolk Southern Corporation (NYSE:NSC)
19.4
25.5
Kansas City Southern (NYSE:KSU)
26.2
26.6
Canadian Pacific Railway Limited (TSX:CP)
22.9
6.2
Canadian National Railway Company (TSX:CNR)
16.5
AVG
UNP
23.9
BNSF
23.7
27.6

31. Appendix – DCF Sensitivity Analysis
Stock Price Sensitivity Table $
Discount rate
7.4%
7.9%
8.4%
EBITDA
11.5x
168.2
164.1
160.1
Exit
12.0x
175.2
170.9
166.8
Multiple
12.5x
182.2
177.8
173.4
Stock Price Sensitivity Table $
Discount rate
7.4%
7.9%
8.4%
EBITDA
11.5x
161.1
157.1
153.2
Exit
12.0x
167.8
163.7
159.7
Multiple
12.5x
174.5
170.2
166.1
Stock Price Sensitivity Table $
Discount rate
7.4%
7.9%
8.4%
EBITDA
11.0x
144.3
140.7
137.2
Exit
11.5x
150.6
146.9
143.2
Multiple
12.0x
156.9
153.1
149.3
Upside
Management
Base
Stock Price Sensitivity Table $
Discount rate
7.4%
7.9%
8.4%
EBITDA
11.0x
124.8
121.6
118.5
Exit
11.5x
130.3
127.0
123.8
Multiple
12.0x
135.9
132.5
129.2
Stock Price Sensitivity Table $
Discount rate
7.4%
7.9%
8.4%
EBITDA
11.0x
119.2
116.2
113.2
Exit
11.5x
124.6
121.4
118.3
Multiple
12.0x
130.0
126.7
123.5
Downside 1
Downside 2

32. Appendix - Relevered Equity Beta
Comparable Companies Unlevered Beta
Predicted
Market
Debt/
Marginal
Unlevered
Company
Levered Beta (4)
Value of Debt
Value of Equity
Equity
Tax Rate
Beta
Kansas City Southern (NYSE:KSU)
0.89
$2,690.0
$10,510.4
25.6%
25%
0.77
CSX Corporation (NasdaqGS:CSX)
1.18
11,800.0
56,424.2
20.9%
1.02
Norfolk Southern Corporation (NYSE:NSC)
1.09
9,736.0
43,956.3
22.1%
0.93
Canadian National Railway Company (TSX:CNR)
0.96
11,870.0
60,578.5
19.6%
38%
0.83
Canadian Pacific Railway Limited (TSX:CP)
1.27
8,155.0
28,275.5
28.8%
1.04
Mean
1.08
23.4%
0.92
Median
UNP Relevered Beta
Target
Relevered
Relevered Beta
20.6%
25.0%
1.06
Sources: Bloomberg, KPMG, CIQ, Companies Financial Reports