Is Union Pacific (UNP) a Good Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Union Pacific Corporation UNP stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks.

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Union Pacific has a trailing twelve months PE ratio of 18.69, as you can see in the chart below:

This level actually compares favorably with the market at large, as the PE for the S&P 500 compares in at about 19.76. If we focus on the long-term PE trend, UNP’s current PE level puts it slightly above its midpoint over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting it might be a good entry point.

Also, the stock’s PE also compares favorably with the industry’s trailing twelve months PE ratio, which stands at 19.90. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Union Pacific has a forward PE ratio (price relative to this year’s earnings) of 17.93, so it is fair to say that a slightly more value-oriented path may be ahead for the stock in the near term too.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business.This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, Union Pacific’s P/CF ratio of 12.64 is lower than its industry average of 14.86, which indicates that the stock is somewhat undervalued in this respect.

Broad Value Outlook

In aggregate, Union Pacific currently has a Zacks Value Style Score of ‘B,’ putting it into the top 20% of all stocks we cover from this look. This makes Union Pacific a solid choice for value investors, and some of its other key metrics make this pretty clear too.

What About the Stock Overall?

Though Union Pacific might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘C’. This gives Union Pacific a Zacks VGM score—or its overarching fundamental grade—of ‘C.’ (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen three upward and five downward estimate revision in the past sixty days, while the current year has seen six upward and three downward estimate revisions in the same time frame.

As a result, the current quarter consensus estimate has decreased by 1.3% in the past two months, while the current year estimate has increased 0.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Apple Inc. Price and Consensus

Apple Inc. Price and Consensus | Apple Inc. Quote

This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

Union Pacific is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. Furthermore, a robust industry rank (among the Top 5%) indicates broader factors at the industry level support the growth potential of the company as well. Again, over  the past one year, its industry has clearly outperformed the broader market, as you can see below:

The company’s Zacks Rank #3 indicates that while the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future. So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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