I get it. I'm not in the know. I don't have an MBA or BS in Accounting, so what do I really know about...stuff? I know that I have dollars at risk. I know it's called invested capital. I know that if I don't due my homework and ask questions, even if those questions seem ignorant, I could loose my invested capital. I do know that at least.

And I know that I have doubts about Union Pacific, or at least its management.

During fiscal 2014 management decided to enact a 2:1 for stock split. Over the last four years, which includes fiscal 2014, management has spent $13.8 billion buying back shares while paying out $7.8 billion in dividends to common shareholders.

What a concept. Let's split shares so there are more of them to buy back. Seems like it would be simpler just to pay out the dough in dividends. But as I said at the start, what do I know?

Union Pacific Corporation

Union Pacific Corporation operates a Class I railroad with 32,000 route miles. The company’s freight traffic consists of coal, grain, rock, or soda ash, lumber, steel, paper, food, chemicals, finished vehicles, intermodal containers and truck trailers. Industry peers include Burlington Northern Santa Fe, LLC, CSX Corporation, and Norfolk Southern Corporation.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $148.83, with an initial trailing stop at $144.81. Upward price movement will find no resistance. Downward price movement will find support at $141.90 and $137.40, with final support at $134.

Days to Cover

The most recent days to cover number is 5. The days to cover number is a measurement of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.

The Tax Act

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of Union Pacific Corporation, as a result of its initial analysis of the Tax Act and existing implementation guidance, the company remeasured its deferred tax assets and liabilities and computed its transition tax liability net of offsetting foreign tax credits. This resulted in a $5.9 billion reduction in its income tax expense in 2017. The company also recorded a $212 million reduction to its operating expense related to income tax adjustments at equity-method affiliates.

Note that for fiscal 2017, 25% of net income came from taxes.

Insider Transactions

In the past 12 months, the company reported 79 insider trades involving 888,086 shares of stock. Of those 79 insider trades, 31 were Buys involving 495,404 shares of stock, and 48 were Sells involving 392,682 shares of stock, creating an insider buy to sell ratio of 1.3 to 1.

Acquisitions

The company recorded no acquisitions during fiscal 2017.

Divestitures and Dispositions
The company recorded no divestitures or dispositions during fiscal 2017.

Year-Over-Year
Several year over year metrics of interest are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For Union Pacific Corporation, revenue grew by 7%, earnings grew by 115%, free cash flow grew by 138%, total debt increased by 13%, and the stock price increased by 23%. Year to date the stock price is up 10%.

Future Value

My future (5 year hold) target price for the stock is $276, which is an average annual return of 18%. A prior five year hold of the stock (FY2013- FY2017) would have returned an average of 23% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value

As an on-going concern, my baseline valuation for the company is $92. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value for the stock is $248. The fair value number is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of a AAA rated corporate bond. Value investing buy, sell, and close targets are derivatives of fair value.

Value Considerations

Other value considerations include the PE Ratio, the PEG Ratio, Book Value, and Tangible Book Value. For Union Pacific Corporation the current twelve month trailing PE Ratio is 9, the PEG Ratio is 0.8, Book Value is $32, and Tangible Book Value is $32.

Fair Warning

Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Union Pacific Corporation (NYSE: UNP) – FYE 12/2017 – UNDER VALUED The stock is currently trading below my most recent $149 buy target. Please See Linked PDF Worksheet