We track insider transactions because we believe that no one knows a company better than the people who work there. It has been proven that insiders tend to outperform the market by as much as 7% annually (read more about how this strategy can boost your returns).
In a recent Form 4 filing with the SEC, one of Union Pacific Corporation (NYSE:UNP)’s officers decided to sell off almost 20% of their shares. Barbara Schaefer, a Union Pacific Senior Vice President since 1997 and Union Pacific employee since 1981, sold 20,000 shares for an average price of $122.96 each. The sale comes after the company’s shares have seen appreciation of nearly 15% year to date. Although this insider has decided to cut their stake, we believe that Union Pacific is one of the better-positioned railway companies out there, and here’s why this move was likely just profit-taking at its finest.
The rail industry is expected to see rail rates rise 4% through 2012, despite the downward pressure of rail transport volumes due to reduced coal and agricultural shipments. Many energy companies traded out coal for natural gas as natural gas prices fell, and drought conditions negatively impacted crop yields. Both of these headwinds are expected to subside in the coming year, allowing Union Pacific to grow revenues over 6% in 2013 on the back of 4% volume growth.
Union Pacific also recently increased its dividend by 15% and now pays a dividend that yields 2.2%. Positives for Union Pacific investors, when compared to the other top rail companies, is that this rail operator has the lowest in-industry debt-to-equity ratio at 0.47, and one of the top returns on equity at 18%. Billionaire D.E. Shaw was the top fund owner for Union Pacific of those we track in 3Q with over 2.2 million shares (check out Shaw’s newest picks here).
Top Union Pacific competitor Kansas City Southern (NYSE:KSU) expects to see the majority of its growth come from long hauls originating from Mexico-based manufacturers—namely in the auto parts industry. Kansas City is expected to grow 2013 revenues by 12% and improve margins as its focuses on improving its equipment productivity with longer hauls. Billionaire investor Ken Fisher – founder of Fisher Asset Management – was the top fund owner of those we track with over 1.1 million shares at the end of 3Q (check out Fisher’s newest stock picks here).
CSX Corporation (NYSE:CSX) expects its growth to be driven by metals shipments and auto parts. CSX has been aggressively purchasing its stock, which is down over 5% year to date. For the first half of 2012, CSX purchased nearly 2% of its outstanding shares or around $300 million in stock.
Another competitor, Norfolk Southern Corp. (NYSE:NSC), is expected to see sales and volume flat in 2012. Norfolk hopes to rebound in 2013 on increased petroleum shipments, with expected revenue to be up 6% by next Christmas. Norfolk is also expected to be able to take market share from trucking companies given its Heartland and Crescent railway network.
Canadian Pacific Railway Limited (NYSE:CP), meanwhile, is expected to see some of the best sales growth in the industry by the end of this year at 9%, followed by 8% expected growth in 2013. A year-ahead sales boost should be driven by a 7% lift in volumes and 2% lift in average revenue per car. Canadian’s key shipment product for 2013 will be a rebound in potash demand. The stock remains a big bet of billionaire Bill Ackman’s, who has over 22% of his fund’s 13F invested in the rail company (see Ackman’s new picks here).
From a valuation standpoint, Union Pacific trades in the mid-range of its peers at 15x earnings, where CSX and Norfolk trade at 11x, and Kanas City Southern and Canadian Pacific are close to 22x each. Obviously, Union Pacific appears attractive; this is a fact that is cemented by its solid forward-looking EPS valuation (13x), which is below its trailing P/E (15x). This suggests investors might be underappreciating the stock’s growth for next year. Union Pacific also trades at a nice PEG of 1.0, with an expected five-year EPS compounded annual growth rate of 14%.
