Will Union Pacific (UNP) Collapse?

Americans recently faced something they thought was history,  a railroad strike.

An all-night bargaining session on 15 September 2022 to an agreement that kept 60% of America’s unionized rail workers from striking. President Joe Biden (D-Delaware) had to intervene to force management and union leaders to make the agreement.

The agreement offers a 24% wage increase and $11,000 in back pay and bonuses. Union members will have to approve the agreement and nobody knows how they will vote. However, the unions’ most vocal demands, which include scrapping point-based employee evaluations and stabilizing work schedules, were not in the agreement.

A Rail Strike is Still Possible

A strike is possible because the memberships of just two of 12 unions threatening a walkout have accepted the agreement, Railway Age reports. Normally, the memberships of all 12 unions will have to approve the agreement.

However, a third union, the Machinists, has rejected the contract, journalist Max Alvarez reports. On 23 September 2022, Alvarez told Counter Points he thinks it will take a month for workers to vote on the deal. Hence, a rail strike or conflict could occur in October.

Chaos could ensue because union leaders could override a vote against the agreement and adopt it without members’ support, Railway Age speculates. In particular, union leaders could subject the contract to binding arbitration, which can block a strike. That could create work stoppages and conflicts between labor, management, and union bosses.

Do Railroads make money?

Thus, America still faces the possibility of a railroad strike, which raises the question. Do railroads, such as Union Pacific (UNP) make money?

The answer in Union Pacific’s case is yes. Union Pacific Corporation (NYSE: UNP) reported a $2.495 billion quarterly operating income and a $2.826 m billion quarterly gross profit on 30 June 2022. The quarterly operating income grew from $2.473 billion on 30 June 2021, and the quarterly gross profit grew from $2.747 billion on 30 June 2022.

Union Pacific’s quarterly revenues grew from $5.504 billion on 30 June 2021 to $6.269 billion on 30 June 2022. Union Pacific’s revenues grew by 13.9% in the quarter ending on 30 June 2022.

How Much Cash is Union Pacific generating?

Thus, Union Pacific (UNP) is a growing company that makes money, but how much cash does it generate?

Union Pacific reported a quarterly operating cash flow of $1.931 billion on 30 June 2022. The quarterly operating cash flow fell from $2.261 billion on 30 June 2021.

Conversely, the quarterly ending cash flow fell from -$39 million on 30 June 2021 to -$116 million on 30 June 2022. Hence, Union Pacific generates some cash, but it can’t keep that cash.

One reason Union Pacific (UP) cannot keep cash is the quarterly financing cash flow. Union Pacific reported a quarterly financing cash flow of -$1.343 billion on 30 June 2022. That means UP paid off $1.343 billion in debts on 30 June 2022.

Yet Union Pacific’s total debt grew from $30.365 billion on 30 June 2021 to $33.616 billion June 2022. Thus, Union Pacific pays off enormous amounts of debt but its debts still grow.

Union Pacific has less cash. Its cash and short-term investments fell from $1.193 billion on 30 June 2021 to $856 million on 30 June 2022. The Union Pacific Corporation has less cash and more debt.

What Value Does Union Pacific (UNP) have?

Union Pacific (UNP) has some value. It had $64.440 billion in total assets on 30 June 2022. The total assets grew from $62.073 billion on 30 June 2021.

Mr. Market thinks Union Pacific has value. He paid $200.86 for Union Pacific stock on 26 June 2022. The share price fell from $201.72 on 23 September 2022.

However, the share price fell from $237.64 on 23 August 2022. Hence, Mr. Market thinks a railroad strike is probable. Notably, Union Pacific’s share price has fallen from $212 on 16 September 2022.

I think Mr. Market overprices Union Pacific at $200.86 because the company has a small amount of cash. Moreover, the strike threat shows Union Pacific’s business is unstable and perhaps untenable.

Union Pacific is the successor corporation to the organization that built America’s first transcontinental railroad in the 1860s. The Union Pacific claims to operate 32,000 miles of track in 23 states. The UP serves America’s biggest port, Los Angeles-Long Beach, and every major gateway to Mexico.

Hence, Union Pacific has value on paper, but what value does it have in real life? In particularly, America’s railroad system is aging.

America’s aging Railroad System

America’s railroad system is aging. For example, the average North American locomotive was 28.1 years old in 2020, Statista estimates. Similarly, the typical freight car was 19.6 years old in 2020.

Hence America’s trains are old. Frighteningly, the tracks those aging trains run on are even older. The average age of US railway infrastructure that needs to be replaced was 111 years-old in 2017, the Infrastructure Report Card alleges.

Furthermore, the railroads could lack track capacity to handle increasing freight volume. The amount of track America’s Class I railroads operate shrank by 30% between 1990 and 2013, the Infrastructure Report Card estimates. Yet the amount of freight Class 1 railroads haul grew by 50% between 1980 and 2017. Union Pacific is a Class 1 railroad. The US Department of Transportation estimates the volume of rail freight could grow by 40% by 2040.

Hence, Union Pacific and other railroads may not have enough track to haul freight and an aging fleet. Modernization is occurring at a slow pace.

How Neglect led to a Rail Strike

I think neglect of America’s railroads led to the potential strike. To explain, railway workers are overworked and angry because of their employers’ limited resources.

Instead of expanding resources, management placed new restrictions and demands on workers which drives labor unrest. Frighteningly, politicians’ solution is to try and restrict workers’ right to strike. That sounds like a recipe for more labor unrest and potentially violence to me.

My analysis is that American railroads will be a poor investment until the federal government makes massive investments in rail. Accordingly, I suggest investors avoid Union Pacific.

However, Union Pacific (UNP) is an attractive dividend stock. Union Pacific has scheduled nine $1.30 quarterly dividends between 30 September 2022 and 30 September 2024. Overall Union Pacific offered a $5.20 forward dividend and a 2.59% forward dividend on 26 September 2022.

I think Union Pacific needs to spend this money modernizing its infrastructure not offering dividends. I think smart investors will avoid rail because this sector could soon collapse because of labor unrest.