Stock Analysis on Net
Stock Analysis on Net

Union Pacific Corp. (NYSE:UNP)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Union Pacific Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 12.76%
01 FCFF0 5,756
1 FCFF1 6,187 = 5,756 × (1 + 7.50%) 5,487
2 FCFF2 6,675 = 6,187 × (1 + 7.88%) 5,250
3 FCFF3 7,226 = 6,675 × (1 + 8.26%) 5,040
4 FCFF4 7,851 = 7,226 × (1 + 8.65%) 4,857
5 FCFF5 8,560 = 7,851 × (1 + 9.03%) 4,696
5 Terminal value (TV5) 250,257 = 8,560 × (1 + 9.03%) ÷ (12.76% – 9.03%) 137,294
Intrinsic value of Union Pacific Corp. capital 162,623
Less: Debt (fair value) 28,500
Intrinsic value of Union Pacific Corp. common stock 134,123
 
Intrinsic value of Union Pacific Corp. common stock (per share) $219.95
Current share price $229.23

Based on: 10-K (reporting date: 2023-12-31).

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Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Union Pacific Corp., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 139,779 0.83 14.25%
Debt (fair value) 28,500 0.17 5.44% = 7.07% × (1 – 23.10%)

Based on: 10-K (reporting date: 2023-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 609,777,914 × $229.23
= $139,779,391,226.22

   Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (22.50% + 22.90% + 23.10% + 23.40% + 23.60%) ÷ 5
= 23.10%

WACC = 12.76%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Union Pacific Corp., PRAT model

Microsoft Excel
Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Interest expense 1,340 1,271 1,157 1,141 1,050
Net income 6,379 6,998 6,523 5,349 5,919
 
Effective income tax rate (EITR)1 22.50% 22.90% 23.10% 23.40% 23.60%
 
Interest expense, after tax2 1,039 980 890 874 802
Add: Cash dividends declared 3,173 3,160 2,800 2,628 2,598
Interest expense (after tax) and dividends 4,212 4,140 3,690 3,502 3,400
 
EBIT(1 – EITR)3 7,418 7,978 7,413 6,223 6,721
 
Debt due within one year 1,423 1,678 2,166 1,069 1,257
Debt due after one year 31,156 31,648 27,563 25,660 23,943
Common shareholders’ equity 14,788 12,163 14,161 16,958 18,128
Total capital 47,367 45,489 43,890 43,687 43,328
Financial Ratios
Retention rate (RR)4 0.43 0.48 0.50 0.44 0.49
Return on invested capital (ROIC)5 15.66% 17.54% 16.89% 14.24% 15.51%
Averages
RR 0.47
ROIC 15.97%
 
FCFF growth rate (g)6 7.50%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,340 × (1 – 22.50%)
= 1,039

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 6,379 + 1,039
= 7,418

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [7,418 – 4,212] ÷ 7,418
= 0.43

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 7,418 ÷ 47,367
= 15.66%

6 g = RR × ROIC
= 0.47 × 15.97%
= 7.50%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (168,279 × 12.76% – 5,756) ÷ (168,279 + 5,756)
= 9.03%

where:

Total capital, fair value0 = current fair value of Union Pacific Corp. debt and equity (US$ in millions)
FCFF0 = the last year Union Pacific Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Union Pacific Corp. capital

FCFF growth rate (g) forecast

Union Pacific Corp., H-model

Microsoft Excel
Year Value gt
1 g1 7.50%
2 g2 7.88%
3 g3 8.26%
4 g4 8.65%
5 and thereafter g5 9.03%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 7.50% + (9.03% – 7.50%) × (2 – 1) ÷ (5 – 1)
= 7.88%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 7.50% + (9.03% – 7.50%) × (3 – 1) ÷ (5 – 1)
= 8.26%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 7.50% + (9.03% – 7.50%) × (4 – 1) ÷ (5 – 1)
= 8.65%