Union Pacific Loses $20 Billion of Intrinsic Value in 2021

Union Pacific

Union Pacific is considered the granddaddy of railroads. It is the most stable of all Class I Railways and generates over $20 Billion per year in revenue. In 2021, Union Pacific had sales of $21.8 Billion, the 2nd highest ever recorded. Union Pacific generated a pretax profit of $8.5 Billion, the highest in its entire history. In effect, 2021 was one of the best if not the best financial year in the history of Union Pacific. But yet, Union Pacific’s intrinsic value dropped $20 Billion during the same time period. How can this happen?

Value investors focus on intrinsic value and the market’s valuation points. However, the Board of Directors are focused on returning value to the shareholders. Basically, the Board authorized a stock buy-back at a price dramatically higher than the stock’s intrinsic value. The difference is equivalent to transferring intrinsic value to a few lucky shareholders at the expense of remaining shareholders. This business concept of treasury stock (buying back stock) is only effective IF the stock is purchased at or less than the stock’s intrinsic value.

This site’s Railway’s Pool identified in February of 2021 that Union Pacific’s intrinsic value was estimated at $188 per share and that a good margin of safety was necessary in order to earn a good return on the investment. Thus, the buy price was set at $162 per share. The book value on 12/31/2020 was $26 per share. Book value on 12/31/2021 went down to $22 per share; yet, Union Pacific earned $10 per share during 2021.

© 2022, David J Hoare MSA. All rights reserved.

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