Intrinsic value of Union Pacific - UNP

Previous Close

$112.99

  Intrinsic Value

$62.62

stock screener

  Rating & Target

sell

-45%

  Value-price divergence*

-23%

Previous close

$112.99

 
Intrinsic value

$62.62

 
Up/down potential

-45%

 
Rating

sell

 
Value-price divergence*

-23%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of UNP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 91.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -8.58
  10.10
  9.59
  9.13
  8.72
  8.35
  8.01
  7.71
  7.44
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
Revenue, $m
  19,941
  21,955
  24,061
  26,257
  28,547
  30,929
  33,407
  35,983
  38,660
  41,441
  44,332
  47,337
  50,462
  53,712
  57,094
  60,614
  64,282
  68,103
  72,087
  76,244
  80,581
  85,110
  89,840
  94,783
  99,951
  105,355
  111,009
  116,925
  123,118
  129,602
  136,394
Variable operating expenses, $m
 
  12,800
  14,027
  15,308
  16,643
  18,032
  19,476
  20,978
  22,539
  24,160
  25,846
  27,598
  29,419
  31,314
  33,286
  35,338
  37,476
  39,704
  42,027
  44,450
  46,979
  49,619
  52,377
  55,259
  58,271
  61,422
  64,718
  68,167
  71,778
  75,558
  79,518
Fixed operating expenses, $m
 
  1,090
  1,117
  1,145
  1,173
  1,203
  1,233
  1,264
  1,295
  1,328
  1,361
  1,395
  1,430
  1,465
  1,502
  1,540
  1,578
  1,617
  1,658
  1,699
  1,742
  1,785
  1,830
  1,876
  1,923
  1,971
  2,020
  2,071
  2,122
  2,175
  2,230
Total operating expenses, $m
  12,669
  13,890
  15,144
  16,453
  17,816
  19,235
  20,709
  22,242
  23,834
  25,488
  27,207
  28,993
  30,849
  32,779
  34,788
  36,878
  39,054
  41,321
  43,685
  46,149
  48,721
  51,404
  54,207
  57,135
  60,194
  63,393
  66,738
  70,238
  73,900
  77,733
  81,748
Operating income, $m
  7,272
  8,066
  8,916
  9,805
  10,731
  11,695
  12,698
  13,741
  14,826
  15,954
  17,126
  18,345
  19,613
  20,932
  22,306
  23,737
  25,227
  26,781
  28,403
  30,094
  31,860
  33,705
  35,633
  37,649
  39,757
  41,962
  44,271
  46,687
  49,218
  51,869
  54,647
EBITDA, $m
  9,310
  10,305
  11,371
  12,483
  13,643
  14,850
  16,106
  17,412
  18,770
  20,181
  21,648
  23,174
  24,760
  26,411
  28,130
  29,920
  31,785
  33,729
  35,756
  37,872
  40,080
  42,387
  44,798
  47,318
  49,953
  52,709
  55,594
  58,614
  61,777
  65,089
  68,560
Interest expense (income), $m
  652
  641
  799
  965
  1,138
  1,319
  1,507
  1,703
  1,906
  2,118
  2,337
  2,566
  2,803
  3,050
  3,306
  3,573
  3,851
  4,141
  4,443
  4,757
  5,085
  5,428
  5,786
  6,159
  6,549
  6,958
  7,384
  7,831
  8,298
  8,787
  9,299
Earnings before tax, $m
  6,766
  7,424
  8,118
  8,840
  9,592
  10,376
  11,191
  12,038
  12,920
  13,836
  14,788
  15,779
  16,810
  17,883
  19,000
  20,163
  21,376
  22,641
  23,960
  25,337
  26,775
  28,277
  29,848
  31,490
  33,207
  35,005
  36,886
  38,856
  40,920
  43,082
  45,348
Tax expense, $m
  2,533
  2,005
  2,192
  2,387
  2,590
  2,801
  3,021
  3,250
  3,488
  3,736
  3,993
  4,260
  4,539
  4,828
  5,130
  5,444
  5,772
  6,113
  6,469
  6,841
  7,229
  7,635
  8,059
  8,502
  8,966
  9,451
  9,959
  10,491
  11,048
  11,632
  12,244
Net income, $m
  4,233
  5,420
  5,926
  6,453
  7,002
  7,574
  8,169
  8,788
  9,431
  10,100
  10,796
  11,519
  12,271
  13,054
  13,870
  14,719
  15,605
  16,528
  17,491
  18,496
  19,546
  20,642
  21,789
  22,988
  24,241
  25,554
  26,927
  28,365
  29,872
  31,450
  33,104

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,337
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  55,718
  59,823
  65,560
  71,546
  77,784
  84,276
  91,027
  98,046
  105,340
  112,919
  120,796
  128,984
  137,498
  146,353
  155,568
  165,162
  175,154
  185,567
  196,424
  207,748
  219,567
  231,907
  244,796
  258,266
  272,346
  287,071
  302,476
  318,597
  335,471
  353,140
  371,645
Adjusted assets (=assets-cash), $m
  54,381
  59,823
  65,560
  71,546
  77,784
  84,276
  91,027
  98,046
  105,340
  112,919
  120,796
  128,984
  137,498
  146,353
  155,568
  165,162
  175,154
  185,567
  196,424
  207,748
  219,567
  231,907
  244,796
  258,266
  272,346
  287,071
  302,476
  318,597
  335,471
  353,140
  371,645
Revenue / Adjusted assets
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
  0.367
Average production assets, $m
  49,628
  54,646
  59,887
  65,355
  71,052
  76,983
  83,150
  89,561
  96,224
  103,148
  110,343
  117,822
  125,599
  133,688
  142,106
  150,869
  159,997
  169,509
  179,426
  189,770
  200,566
  211,838
  223,612
  235,916
  248,778
  262,229
  276,301
  291,026
  306,441
  322,580
  339,484
Working capital, $m
  -44
  -681
  -746
  -814
  -885
  -959
  -1,036
  -1,115
  -1,198
  -1,285
  -1,374
  -1,467
  -1,564
  -1,665
  -1,770
  -1,879
  -1,993
  -2,111
  -2,235
  -2,364
  -2,498
  -2,638
  -2,785
  -2,938
  -3,098
  -3,266
  -3,441
  -3,625
  -3,817
  -4,018
  -4,228
Total debt, $m
  15,007
  17,747
  21,442
  25,297
  29,314
  33,494
  37,843
  42,363
  47,060
  51,941
  57,014
  62,287
  67,770
  73,472
  79,407
  85,585
  92,020
  98,726
  105,718
  113,011
  120,622
  128,569
  136,870
  145,544
  154,612
  164,095
  174,016
  184,397
  195,264
  206,643
  218,561
Total liabilities, $m
  35,786
  38,526
  42,221
  46,076
  50,093
  54,273
  58,622
  63,142
  67,839
  72,720
  77,793
  83,066
  88,549
  94,251
  100,186
  106,364
  112,799
  119,505
  126,497
  133,790
  141,401
  149,348
  157,649
  166,323
  175,391
  184,874
  194,795
  205,176
  216,043
  227,422
  239,340
Total equity, $m
  19,932
  21,297
  23,339
  25,470
  27,691
  30,002
  32,406
  34,904
  37,501
  40,199
  43,004
  45,918
  48,949
  52,102
  55,382
  58,798
  62,355
  66,062
  69,927
  73,958
  78,166
  82,559
  87,147
  91,943
  96,955
  102,197
  107,681
  113,420
  119,428
  125,718
  132,306
Total liabilities and equity, $m
  55,718
  59,823
  65,560
  71,546
  77,784
  84,275
  91,028
  98,046
  105,340
  112,919
  120,797
  128,984
  137,498
  146,353
  155,568
  165,162
  175,154
  185,567
  196,424
  207,748
  219,567
  231,907
  244,796
  258,266
  272,346
  287,071
  302,476
  318,596
  335,471
  353,140
  371,646
Debt-to-equity ratio
  0.753
  0.830
  0.920
  0.990
  1.060
  1.120
  1.170
  1.210
  1.250
  1.290
  1.330
  1.360
  1.380
  1.410
  1.430
  1.460
  1.480
  1.490
  1.510
  1.530
  1.540
  1.560
  1.570
  1.580
  1.590
  1.610
  1.620
  1.630
  1.640
  1.640
  1.650
Adjusted equity ratio
  0.342
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356
  0.356

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  4,233
  5,420
  5,926
  6,453
  7,002
  7,574
  8,169
  8,788
  9,431
  10,100
  10,796
  11,519
  12,271
  13,054
  13,870
  14,719
  15,605
  16,528
  17,491
  18,496
  19,546
  20,642
  21,789
  22,988
  24,241
  25,554
  26,927
  28,365
  29,872
  31,450
  33,104
Depreciation, amort., depletion, $m
  2,038
  2,240
  2,454
  2,678
  2,912
  3,155
  3,408
  3,671
  3,944
  4,227
  4,522
  4,829
  5,148
  5,479
  5,824
  6,183
  6,557
  6,947
  7,354
  7,777
  8,220
  8,682
  9,164
  9,669
  10,196
  10,747
  11,324
  11,927
  12,559
  13,221
  13,913
Funds from operations, $m
  8,270
  7,659
  8,380
  9,132
  9,914
  10,729
  11,577
  12,459
  13,375
  14,328
  15,318
  16,348
  17,419
  18,533
  19,694
  20,902
  22,162
  23,475
  24,844
  26,273
  27,766
  29,324
  30,953
  32,656
  34,437
  36,301
  38,251
  40,293
  42,431
  44,670
  47,017
Change in working capital, $m
  745
  -62
  -65
  -68
  -71
  -74
  -77
  -80
  -83
  -86
  -90
  -93
  -97
  -101
  -105
  -109
  -114
  -118
  -124
  -129
  -134
  -140
  -147
  -153
  -160
  -168
  -175
  -183
  -192
  -201
  -211
Cash from operations, $m
  7,525
  7,722
  8,446
  9,200
  9,985
  10,803
  11,654
  12,538
  13,458
  14,414
  15,407
  16,441
  17,516
  18,634
  19,799
  21,012
  22,275
  23,593
  24,968
  26,402
  27,900
  29,465
  31,100
  32,809
  34,597
  36,468
  38,426
  40,476
  42,623
  44,871
  47,228
Maintenance CAPEX, $m
  0
  -2,034
  -2,240
  -2,454
  -2,678
  -2,912
  -3,155
  -3,408
  -3,671
  -3,944
  -4,227
  -4,522
  -4,829
  -5,148
  -5,479
  -5,824
  -6,183
  -6,557
  -6,947
  -7,354
  -7,777
  -8,220
  -8,682
  -9,164
  -9,669
  -10,196
  -10,747
  -11,324
  -11,927
  -12,559
  -13,221
New CAPEX, $m
  -3,505
  -5,019
  -5,241
  -5,468
  -5,698
  -5,930
  -6,167
  -6,411
  -6,663
  -6,924
  -7,195
  -7,479
  -7,777
  -8,089
  -8,417
  -8,763
  -9,128
  -9,512
  -9,917
  -10,345
  -10,796
  -11,272
  -11,774
  -12,304
  -12,862
  -13,451
  -14,072
  -14,725
  -15,414
  -16,140
  -16,904
Cash from investing activities, $m
  -3,393
  -7,053
  -7,481
  -7,922
  -8,376
  -8,842
  -9,322
  -9,819
  -10,334
  -10,868
  -11,422
  -12,001
  -12,606
  -13,237
  -13,896
  -14,587
  -15,311
  -16,069
  -16,864
  -17,699
  -18,573
  -19,492
  -20,456
  -21,468
  -22,531
  -23,647
  -24,819
  -26,049
  -27,341
  -28,699
  -30,125
Free cash flow, $m
  4,132
  669
  965
  1,277
  1,609
  1,961
  2,331
  2,719
  3,125
  3,546
  3,985
  4,439
  4,910
  5,398
  5,902
  6,424
  6,965
  7,524
  8,104
  8,704
  9,327
  9,973
  10,644
  11,341
  12,067
  12,821
  13,607
  14,427
  15,281
  16,172
  17,103
Issuance/(repayment) of debt, $m
  970
  3,498
  3,695
  3,855
  4,017
  4,181
  4,348
  4,520
  4,697
  4,881
  5,073
  5,273
  5,483
  5,703
  5,934
  6,178
  6,435
  6,706
  6,992
  7,293
  7,611
  7,947
  8,301
  8,674
  9,068
  9,483
  9,921
  10,382
  10,867
  11,379
  11,917
Issuance/(repurchase) of shares, $m
  -3,105
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -2,367
  3,498
  3,695
  3,855
  4,017
  4,181
  4,348
  4,520
  4,697
  4,881
  5,073
  5,273
  5,483
  5,703
  5,934
  6,178
  6,435
  6,706
  6,992
  7,293
  7,611
  7,947
  8,301
  8,674
  9,068
  9,483
  9,921
  10,382
  10,867
  11,379
  11,917
Total cash flow (excl. dividends), $m
  1,765
  4,167
  4,660
  5,132
  5,626
  6,142
  6,679
  7,239
  7,822
  8,428
  9,058
  9,712
  10,393
  11,100
  11,837
  12,602
  13,400
  14,230
  15,095
  15,997
  16,938
  17,920
  18,945
  20,016
  21,135
  22,304
  23,528
  24,808
  26,148
  27,551
  29,021
Retained Cash Flow (-), $m
  770
  -1,944
  -2,042
  -2,131
  -2,220
  -2,311
  -2,404
  -2,499
  -2,597
  -2,698
  -2,804
  -2,915
  -3,031
  -3,153
  -3,281
  -3,415
  -3,557
  -3,707
  -3,865
  -4,032
  -4,207
  -4,393
  -4,589
  -4,795
  -5,013
  -5,242
  -5,484
  -5,739
  -6,007
  -6,290
  -6,588
Prev. year cash balance distribution, $m
 
  579
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  2,802
  2,618
  3,001
  3,406
  3,831
  4,276
  4,741
  5,225
  5,729
  6,253
  6,797
  7,362
  7,948
  8,556
  9,187
  9,842
  10,523
  11,230
  11,966
  12,731
  13,527
  14,356
  15,220
  16,122
  17,062
  18,044
  19,069
  20,141
  21,261
  22,433
Discount rate, %
 
  5.30
  5.57
  5.84
  6.14
  6.44
  6.76
  7.10
  7.46
  7.83
  8.22
  8.63
  9.06
  9.52
  9.99
  10.49
  11.02
  11.57
  12.15
  12.76
  13.39
  14.06
  14.77
  15.50
  16.28
  17.09
  17.95
  18.85
  19.79
  20.78
  21.82
PV of cash for distribution, $m
 
  2,661
  2,349
  2,531
  2,684
  2,804
  2,887
  2,933
  2,939
  2,907
  2,838
  2,734
  2,599
  2,437
  2,255
  2,056
  1,848
  1,636
  1,426
  1,223
  1,031
  853
  694
  553
  432
  330
  247
  180
  128
  89
  60
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Union Pacific Corporation is a railroad operating company in the United States. The Company operates through its principal operating company, Union Pacific Railroad Company (UPRR). Its business mix includes Agricultural Products, Automotive, Chemicals, Coal, Industrial Products and Intermodal. Its freight traffic consists of bulk, manifest, and premium business. Bulk traffic primarily consists of coal, grain, soda ash, ethanol, rock and crude oil shipped in unit trains-trains transporting a single commodity from one origin to one destination. Manifest traffic includes individual carload or less than train-load business involving commodities, such as lumber, paper, food and chemicals. The transportation of finished vehicles, auto parts, intermodal containers and truck trailers are included as part of its premium business. As of December 31, 2016, its network included 32,070 route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and Eastern United States gateways.

FINANCIAL RATIOS  of  Union Pacific (UNP)

Valuation Ratios
P/E Ratio 21.8
Price to Sales 4.6
Price to Book 4.6
Price to Tangible Book
Price to Cash Flow 12.2
Price to Free Cash Flow 22.9
Growth Rates
Sales Growth Rate -8.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -24.6%
Cap. Spend. - 3 Yr. Gr. Rate 0.1%
Financial Strength
Quick Ratio 2
Current Ratio 0.1
LT Debt to Equity 71.5%
Total Debt to Equity 75.3%
Interest Coverage 11
Management Effectiveness
Return On Assets 8.4%
Ret/ On Assets - 3 Yr. Avg. 9.6%
Return On Total Capital 12.1%
Ret/ On T. Cap. - 3 Yr. Avg. 14.2%
Return On Equity 20.8%
Return On Equity - 3 Yr. Avg. 22.7%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 81.2%
Gross Margin - 3 Yr. Avg. 78.5%
EBITDA Margin 47.4%
EBITDA Margin - 3 Yr. Avg. 46.5%
Operating Margin 36.5%
Oper. Margin - 3 Yr. Avg. 36.6%
Pre-Tax Margin 33.9%
Pre-Tax Margin - 3 Yr. Avg. 34.6%
Net Profit Margin 21.2%
Net Profit Margin - 3 Yr. Avg. 21.6%
Effective Tax Rate 37.4%
Eff/ Tax Rate - 3 Yr. Avg. 37.7%
Payout Ratio 44.4%

UNP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the UNP stock intrinsic value calculation we used $19941 million for the last fiscal year's total revenue generated by Union Pacific. The default revenue input number comes from 2016 income statement of Union Pacific. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our UNP stock valuation model: a) initial revenue growth rate of 10.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.3%, whose default value for UNP is calculated based on our internal credit rating of Union Pacific, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Union Pacific.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of UNP stock the variable cost ratio is equal to 58.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1063 million in the base year in the intrinsic value calculation for UNP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.5% for Union Pacific.

Corporate tax rate of 27% is the nominal tax rate for Union Pacific. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the UNP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for UNP are equal to 248.9%.

Life of production assets of 24.4 years is the average useful life of capital assets used in Union Pacific operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for UNP is equal to -3.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $19932 million for Union Pacific - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 805.606 million for Union Pacific is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Union Pacific at the current share price and the inputted number of shares is $91.0 billion.

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Financial statements of UNP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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