Union Pacific Corporation (UNP) in Omaha, Neb., and Norfolk Southern Corporation (NSC) in Atlanta, Ga., are two prominent players in the railroad industry. UNP hauls agricultural, automotive, and chemical products and offers long-haul routes from all major West Coast and Gulf Coast ports to eastern gateways connected with Canada’s rail systems and serves the major gateways to Mexico. As of Dec. 31, 2021, its rail network included 32,452 route miles. In comparison, NSC transports raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of the United States. It also transports overseas freight through various Atlantic and Gulf Coast ports. As of Dec. 31, 2021, the company operated approximately 19,300 route miles.
Rising economic and industrial activities have enabled the railroad industry to rebound from pandemic lows. But rail traffic fluctuated due to the resurgence of COVID-19 cases last year.
Since concerns over the growing supply chain crisis and surge in oil and commodity prices are steering a focus on domestic production, an interest in fuel-efficient rail and intermodal services should rise. Also, the deployment of biodiesel and renewable fuels in locomotives should help these companies progress toward low carbon emission goals. Furthermore, significant funding from last year’s bipartisan infrastructure bill to improve rail infrastructure should drive the industry’s growth. The global rail market is expected to grow at a 4.3% CAGR to $974.20 million by 2026. So, both UNP and NSC should benefit substantially.
While NSC stock has declined 10.4% in price year-to-date, UNP has gained 2.3%. UNP is also the clear winner with 25.4% gains over the past six months versus NSC’s 7.7% returns. But which of these stocks is a better pick now? Let’s find out.
On March 8, 2022, UNP announced it would begin using a higher biodiesel blend in locomotives it acquired from Wabtec Corporation (WAB), a leading global provider of technology products and services for the rail industry. UNP will begin testing B20 biodiesel and R55 renewable diesel on trains powered by Wabtec FDL engines in the second quarter. This collaboration will help UNP increase the percentage of low-carbon fuels consumed to 10% of its total diesel consumption by 2025 and 20% by 2030.
On March 23, 2022, WAB received an additional multi-year order from NSC to modernize 330 of its locomotives as part of its ongoing efforts to improve fuel efficiency further and reduce maintenance costs and emissions from its fleet. This should also help NSC achieve its 42% target reduction in emissions intensity by 2034.
Recent Financial Results
UNP’s total operating revenues for its fiscal 2021 fourth quarter, ended Dec. 31, 2021, increased 11.5% year-over-year to $5.73 billion. The company’s operating income came in at $2.44 billion, indicating a 21.6% year-over-year improvement. While its net income increased 24% year-over-year to $1.71 billion, its non-GAAP EPS grew 29.8% to $2.66. As of Dec. 31, 2021, the company had $960 million in cash and cash equivalents.
For its fiscal 2021 fourth quarter, ended Dec. 31, 2021, NSC’s total railway operating revenues increased 10.8% year-over-year to $2.85 billion. The company’s income from railway operations came in at $1.13 billion, up 14.7% from the prior-year period. While its net income increased 13.3% year-over-year to $760 million, its EPS grew 18.2% to $3.12. The company had $839 million in cash and equivalents as of December 31, 2021.
Past and Expected Financial Performance
Over the past three years, UNP’s EBITDA, net income, and levered free cash flow have increased at CAGRs of 2.6%, 3%, and 11.2%, respectively.
UNP’s EPS is expected to grow 16.5% year-over-year in its fiscal year 2022, ending Dec. 31, 2022, and 10.9% in its fiscal 2023. Its revenue is expected to grow 9.3% year-over-year in fiscal 2022 and 5% in fiscal 2023. Analysts expect the company’s EPS to grow at a 16.8% rate per annum over the next five years.
In comparison, NSC’s EBITDA, net income, and levered free cash flow have increased at CAGRs of 3.8%, 4.1%, and 18.7%, respectively, over the past three years.
Analysts expect NSC’s EPS to improve 14.3% year-over-year in fiscal 2022, ending Dec. 31, 2022, and 10.4% in its fiscal 2023. Its revenue is expected to grow 8.7% year-over-year in fiscal 2022 and 4.3% in fiscal 2023. Analysts expect the company’s EPS to grow at a 13.3% rate per annum over the next five years.
In terms of non-GAAP forward PEG, UNP is currently trading at 2.11x, which is 67.5% higher than NSC’s 1.26x. And in terms of forward EV/Sales, NSC’s 6.40x compares with UNP’s 8.16x.
UNP’s trailing-12-month revenue is almost twice NSC’s. UNP is also more profitable, with a 58.5% gross profit margin versus NSC’s 51.4%.
Furthermore, UNP’s ROE, ROA, and ROTC of 41.9%, 9.3%, and 12.9%, respectively, compare with NSC’s 21.1%, 7.4%, and 10%.
While UNP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, NSC has an overall C grade, which equates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both UNP and NSC have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. UNP’s 42.9% trailing-12-month EBIT margin is 351.2% higher than the 9.5% industry average. NSC has a 40.8% EBIT margin, which is 328.9% higher than the 9.5% industry average.
In terms of Momentum, both UNP and NSC are rated B, owing to their impressive price gains over the past year. UNP has gained 25.4% over the past six months, while NSC returned 7.7%.
Among the 16 stocks in the B-rated Railroads industry, UNP is ranked #2, while NSC is ranked #10.
Beyond what we have stated above, our POWR Ratings system has also rated UNP and NSC for Stability, Value, Sentiment, and Growth. Get all UNP ratings here. Also, click here to see the additional POWR Ratings for NSC.
The immense demand for fuel-efficient railroad services amid a growing supply chain crisis should benefit UNP and NSC. However, its higher profitability we think makes UNP a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Railroads industry.
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UNP shares were trading at $253.08 per share on Tuesday afternoon, down $4.66 (-1.81%). Year-to-date, UNP has gained 0.95%, versus a -4.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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