Better Buy: Union Pacific vs. Canadian Pacific Railway

Union Pacific Corporation (UNP) and Canadian Pacific Railway Limited (CP) are two of the largest freight railway operators in the United States and Canada. UNP offers transportation services for agricultural products, including grains, fertilizers, coal and sand, as well as petroleum, and liquid petroleum gases. CP offers rail and intermodal transportation services for  bulk commodities, including grain, coal, potash, fertilizers, and Sulphur, and merchandise freight.

Lockdown measures and other disruptions caused by theCOVID-19 pandemic  dealt a serious blow to the rail industry last year. However, with the gradual re-opening of the global economy, shipment volumes have been steadily picking up pace.

As the leading players in this sector, UNP and CP  have exhibited decent quarterly performance due to strength in their bulk franchises and the power of their domestic intermodal and automotive operations. Hence, we believe they are well positioned to make incremental and sustainable gains in the coming months.

While UNP has returned 190.5% over the past five years, CP has gained 228.5%. In terms of the past month’s performance, UNP is the clear winner with 5.7% returns versus CP’s 2.2%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

On November 20, UNP announced the opening of the Union Pacific Twin Cities Intermodal Terminal in  Minneapolis. This will expand its customers' reach to key Upper Midwest markets. The company also plans to evaluate additional service expansion opportunities into the Twin Cities Intermodal Terminal throughout 2021.

On December 23, CP announced the completion of an agreement to purchase an 83.5% stake in the Detroit River Rail Tunnel. This acquisition will  enable the company to boost its cash flow substantially.

Recent Financial Results

In the third quarter ended September 30, 2020, UNP’s intermodal freight revenue surged 5% year-over-year to $1.07 billion. The company reported a sharp rebound in volume, which increased 19% from the second quarter.

UNP’s grain and grain products carloads’ revenue increased 3%, while fertilizer revenue rose 4% from its  year-ago value to $50 million. Moreover, the company’s quarterly locomotive productivity was 138 gross ton-miles per horsepower per day, an all-time quarterly record and an 11% improvement compared to third quarter 2019.

CP’s operating ratio for the third quarter ended September 30, 2020 increased 210 basis points year-over-year to 58.2%. The company’s cash and cash equivalents rose 26.2% from the year-ago value to CAD $183 million. Its  freight revenue from grains increased 11.7% over this period.

Past and Expected Financial Performance

UNP’s net income and total assets have grown at a CAGR of 5.5% and 3.5%, respectively, over the past three years. The company’s EPS grew at a CAGR of 11.6% over this period.

Analysts expect the company’s revenue to increase 8.3% in the current year. UNP’s EPS is expected to grow 18.3% in 2021. Moreover, its EPS is expected to grow at a rate of 8.9% per annum over the next five years.

In comparison,  CP’s net income and total assets grew at a CAGR of 8.5% and 6.9%, respectively, over the past three years. The CAGR of the company’s EPS has been 11.1%.

Analysts expect the company’s revenue to increase 7.4% in the current year. Its  EPS is expected to grow 14.9% in 2021. CP’s EPS is expected to grow at a rate of 7.7% per annum over the next five years.

Profitability      

UNP’s trailing-12-month revenue is more than three times CP’s. But CP is slightly more profitable with a gross profit margin of 58% versus UNP’s 57.5%.

However, UNP’s levered free cash flow margin of 17.2% compares favorably with CP’s 12.5%.

Valuation

In terms of forward P/E, UNP is currently trading at 27.1x, 5.2% more expensive than CP which is currently trading at 25.76x. However, UNP’s trailing-12-month Price/Sales of 7.49x is 8.7% lower than UNP’s 8.2x.

POWR Ratings

Both UNP and CP are rated “Strong Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for UNP and CP:

UNP has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. In the 20-stock Railroads industry, it is ranked #1.

CP has an “A” for Trade Grade and Buy & Hold Grade, a “B” for Industry Rank, and a “C” for Peer Grade. It is ranked #5 out of 20 stocks in the same industry.

The Winner

While both UNP and CP are good investment bets considering the factors discussed here, UNP appears to be a better choice.

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UNP shares were trading at $210.33 per share on Thursday afternoon, down $7.85 (-3.60%). Year-to-date, UNP has gained 1.01%, versus a 2.72% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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