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Investment Thesis Keith Schoonmaker, CFA, Sector Director, 22 January 2017 Union Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial deregulation in 1980, as the railroad eliminated unprofitable routes and gained efficiency during industry consolidation. Rails have improved performance by rightsizing assets, reducing crew size, and deploying technology. UP is surprisingly nimble for a huge asset-based enterprise: When 2009 carloads slid 16%, UP cut costs faster than sales declined, then set record operating ratios in 2010, 2012, 2013, and 2014. Even a 9% coal carload decline in 2013 couldn't keep UP from reaching record margins. UP also reached record margins when contending with a rapid influx of volume during mid-2014, although velocity and terminal dwell suffered somewhat. UP's $20 billion of 2016 revenue was heaviest in coal, intermodal, and industrial products. Even though we believe coal is in a secular decline, Powder River Basin coal is still a giant franchise for the rail. We estimate coal will produce more than $2 billion of revenue at UP this year. UP historically was less exposed to intermodal shipping than its Western peer, BNSF, but intermodal now constitutes 20% of its top line, and we consider it the secular growth driver. For years, part of the UP story was the upside potential remaining in repricing old contracts, some of which lacked effective fuel surcharges or failed to fully reflect market rates, but no material legacy contracts remain at this point. In addition to improving prices, UP has steadily decreased the fraction of its revenue spent on salaries and benefits and fuel. We are impressed by progress made so far and project more record-setting margins in coming years, as well as additional share buybacks. UP produced a prodigious $4.5 billion of free cash flow (cash from operations less capital expenditures) in 2016--greater than 20% of sales--and returned it to shareholders in the form of $1.9 billion of dividends and $3.1 billion of share repurchases. The firm more than tripled dividends per share from the start of Important Disclosure: The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of), and Investment Research Policy. For information regarding conflicts of interest, please visit http://global.morningstar.com/ equitydisclosures UP Still Produces Outstanding Operating Ratio and Free Cash Flow Margins Despite Weak Volumes Bulls Say OUP's Western tracks afford access to attractive freight. UP hauls a cargo mix rich in commodities such as agriculture and containers ferrying imported goods from Asia. OCompared with trucking, shipping by rail is less expensive for long distances, is 4 times more fuel- efficient per ton-mile shipped, and generally has ample capacity. OCoal that UP hauls from the PRB is substantially cheaper (delivered price per million BTU) than coal from other regions. While we believe cheap natural gas will continue to reduce coal demand, PRB coal will be less affected than Appalachian. Bears Say OUnlike trucking firms, railroads must build and maintain their roads. High required maintenance capital expenditures consume at least half of UP's capital expenditures. ORailroads face risk of reregulation on several fronts, including safety bills and Surface Transportation Board-permissible rate calculations. OUP's large automotive franchise contributed 11% of 2016 freight revenue. This high exposure was a liability when the firm's auto volume dropped 19% during 2008, then an astonishing 30% in 2009. Morningstar Pillars Analyst Quantitative Economic Moat Wide Wide Valuation QQQ Fairly Valued Uncertainty Medium Low Financial Health Moderate Current 5-Yr Avg Sector Country Price/Quant Fair Value 1.03 0.97 1.02 1.02 Price/Earnings 21.8 17.5 19.3 22.4 Forward P/E 19.5 16.6 16.8 Price/Cash Flow 12.7 11.2 10.3 12.9 Price/Free Cash Flow 28.1 27.0 16.6 19.3 Trailing Dividend Yield% 2.08 2.06 2.20 1.93 2010 through 2016, and at times it vies with Norfolk Southern for greatest dividend yield among the rails. Analyst Note Keith Schoonmaker, CFA, Sector Director, 22 January 2017 Union Pacific fourth-quarter carloads declined 3%, dropping in five of six reported freight commodities--only agriculture improved year on year (a strong 8%). The rail improved its operating ratio 1.2 basis points to 62.0% to complete the full year at 63.5%. After incorporating 2016 results and updating our near-term projections, we increased our fair value estimate by $3 per share to $113 chiefly due to lower budgeted 2017 capital expenditure and the time value of money. Coal volume declined 9% from the prior-year period--16% lower in the Powder River Basin offset by 24% improvement from other regions. Chemical carloads were up 1% excluding the 71% decline in crude. We're impressed with UP's $4 billion of free cash flow (industry-leading 20% of sales). The firm deployed this plus $1 billion more on dividends and share repurchases. Even with weak volumes, UP gushes cash. Low 1% core price improvement was the lowest in a decade, and last quarter was weak too. What is essential is to grow price dollars greater than inflation dollars over the long run (inflation was 1.5% this quarter), and we believe UP can accomplish this even if some quarters face stronger competitive forces than others. In fact, management indicates that core price improved 2%-3%, excluding intermodal and coal. Looking forward, management guides to a low-single-digit volume increase in 2017, with improvement in coal, domestic intermodal, and agriculture, and is confident in its ability to improve OR from this year's 63.5% via volume, pricing, and productivity improvements. This sets the firm on track toward achieving it's "60% plus or minus" target by 2019 and mid 50s longer term. We expect coal to improve during the first half of 2017 as inventories are slightly lower than last year, though still historically high, because more gas is more expensive than it was last year. Henry Hub is currently around $3.40 per MMBTU versus Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly Valued Overvalued Quantitative Valuation p USA UNP Morningstar Equity Analyst Report | Report as of 22 Jan 2017 10:55, UTC | Page 1 of 14 Union Pacific Corp UNP (XNYS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship 22 Jan 2017 22:39, UTC 22 Jan 2017 22 Jan 2017 22:36, UTC 20 Jan 2017 20 Jan 2017 20 Jan 2017 QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard ©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ?
Transcript
Page 1: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Investment Thesis Keith Schoonmaker, CFA, Sector Director, 22 January 2017

Union Pacific is a massive railroad, and it's getting biggerand even better. Success followed a couple of decadesafter partial deregulation in 1980, as the railroadeliminated unprofitable routes and gained efficiencyduring industry consolidation. Rails have improvedperformance by rightsizing assets, reducing crew size, anddeploying technology. UP is surprisingly nimble for a hugeasset-based enterprise: When 2009 carloads slid 16%,UP cut costs faster than sales declined, then set recordoperating ratios in 2010, 2012, 2013, and 2014. Even a9% coal carload decline in 2013 couldn't keep UP fromreaching record margins. UP also reached record marginswhen contending with a rapid influx of volume duringmid-2014, although velocity and terminal dwell sufferedsomewhat.

UP's $20 billion of 2016 revenue was heaviest in coal,intermodal, and industrial products. Even though webelieve coal is in a secular decline, Powder River Basincoal is still a giant franchise for the rail. We estimate coalwill produce more than $2 billion of revenue at UP thisyear. UP historically was less exposed to intermodalshipping than its Western peer, BNSF, but intermodal nowconstitutes 20% of its top line, and we consider it thesecular growth driver.

For years, part of the UP story was the upside potentialremaining in repricing old contracts, some of which lackedeffective fuel surcharges or failed to fully reflect marketrates, but no material legacy contracts remain at thispoint. In addition to improving prices, UP has steadilydecreased the fraction of its revenue spent on salariesand benefits and fuel.

We are impressed by progress made so far and projectmore record-setting margins in coming years, as well asadditional share buybacks. UP produced a prodigious $4.5billion of free cash flow (cash from operations less capitalexpenditures) in 2016--greater than 20% of sales--andreturned it to shareholders in the form of $1.9 billion ofdividends and $3.1 billion of share repurchases. The firmmore than tripled dividends per share from the start of

Important Disclosure: The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy(or an equivalent of), and Investment Research Policy. For information regarding conflicts of interest, please visit http://global.morningstar.com/equitydisclosures

UP Still Produces Outstanding Operating Ratio and Free Cash FlowMargins Despite Weak Volumes

Bulls Say

OUP's Western tracks afford access to attractivefreight. UP hauls a cargo mix rich in commodities suchas agriculture and containers ferrying imported goodsfrom Asia.

OCompared with trucking, shipping by rail is lessexpensive for long distances, is 4 times more fuel-efficient per ton-mile shipped, and generally hasample capacity.

OCoal that UP hauls from the PRB is substantiallycheaper (delivered price per million BTU) than coalfrom other regions. While we believe cheap naturalgas will continue to reduce coal demand, PRB coalwill be less affected than Appalachian.

Bears Say

OUnlike trucking firms, railroads must build andmaintain their roads. High required maintenancecapital expenditures consume at least half of UP'scapital expenditures.

ORailroads face risk of reregulation on severalfronts, including safety bills and SurfaceTransportation Board-permissible rate calculations.

OUP's large automotive franchise contributed 11%of 2016 freight revenue. This high exposure was aliability when the firm's auto volume dropped 19%during 2008, then an astonishing 30% in 2009.

Morningstar Pillars Analyst Quantitative

Economic Moat Wide WideValuation QQQ Fairly ValuedUncertainty Medium LowFinancial Health — Moderate

Current 5-Yr Avg Sector Country

Price/Quant Fair Value 1.03 0.97 1.02 1.02Price/Earnings 21.8 17.5 19.3 22.4Forward P/E 19.5 — 16.6 16.8Price/Cash Flow 12.7 11.2 10.3 12.9Price/Free Cash Flow 28.1 27.0 16.6 19.3Trailing Dividend Yield% 2.08 2.06 2.20 1.93

2010 through 2016, and at times it vies with NorfolkSouthern for greatest dividend yield among the rails.

Analyst Note Keith Schoonmaker, CFA, Sector Director, 22 January 2017

Union Pacific fourth-quarter carloads declined 3%,dropping in five of six reported freight commodities--onlyagriculture improved year on year (a strong 8%). The railimproved its operating ratio 1.2 basis points to 62.0% tocomplete the full year at 63.5%. After incorporating 2016results and updating our near-term projections, weincreased our fair value estimate by $3 per share to $113chiefly due to lower budgeted 2017 capital expenditureand the time value of money.

Coal volume declined 9% from the prior-year period--16%lower in the Powder River Basin offset by 24%improvement from other regions. Chemical carloads wereup 1% excluding the 71% decline in crude. We'reimpressed with UP's $4 billion of free cash flow(industry-leading 20% of sales). The firm deployed thisplus $1 billion more on dividends and share repurchases.Even with weak volumes, UP gushes cash.

Low 1% core price improvement was the lowest in adecade, and last quarter was weak too. What is essentialis to grow price dollars greater than inflation dollars overthe long run (inflation was 1.5% this quarter), and webelieve UP can accomplish this even if some quarters facestronger competitive forces than others. In fact,management indicates that core price improved 2%-3%,excluding intermodal and coal.

Looking forward, management guides to a low-single-digitvolume increase in 2017, with improvement in coal,domestic intermodal, and agriculture, and is confident inits ability to improve OR from this year's 63.5% via volume,pricing, and productivity improvements. This sets the firmon track toward achieving it's "60% plus or minus" targetby 2019 and mid 50s longer term. We expect coal toimprove during the first half of 2017 as inventories areslightly lower than last year, though still historically high,because more gas is more expensive than it was last year.Henry Hub is currently around $3.40 per MMBTU versus

Source: Morningstar Equity Research

Source: Morningstar

Undervalued Fairly Valued Overvalued

Quantitative Valuation

pUSA

UNP

Morningstar Equity Analyst Report | Report as of 22 Jan 2017 10:55, UTC | Page 1 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 2: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

$2 or lower for 2016 rates; we anticipate coal demandwill benefit.

Economic Moat Keith Schoonmaker, CFA, Sector Director, 22 January 2017

While the rails don't outearn their cost of capital by much,our wide moat rating stems from our confidence that railswill generate positive economic profits for the benefit ofshare owners with near certainty 10 years from now, andmore likely than not 20 years from now; by ourmethodology, this defines a wide economic moat.

UP's wide economic moat is based on cost advantagesand efficient scale. While barges, ships, aircraft, andtrucks also haul freight, railroads are the low-cost optionby far where no waterway connects the origin anddestination, especially for freight with low value per unitweight. Moreover, railroads claim quadruple the fuelefficiency of trucking per ton-mile of freight, and thanksto greater railcar capacity and train length make moreeffective use of manpower despite the need for train yardpersonnel. Even for goods that can be shipped by truck,we estimate railroads charge 10%-30% less than truckersto transport containers on the same lane.

Efficient scale followed industry consolidation escalatedby the 1980 Staggers Act, which permitted extensive railline sales, abandonment, and combination. North Americanumbered more than 40 Class I rails in 1980, but todaythere are just eight major railroads (a Class I generatedat least $452.7 million in 2012 operating revenue).Staggers also allowed private contracts and rate setting.On all but the busiest lanes (like Wyoming’s coal-richPowder River Basin), generally a single railroad serves anend-of-the-line shipper, and only two railroads operate inmost regions in North America. Indeed, we opine thatabsent government intervention, the rational number ofcompetitors on the continent would be two, via additionalconsolidation, since in most regions customers alreadyhave only two capable providers.

The network of track and assets that U.S. Class I railroadshave in place is impossible to replicate. The UP system

Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE

Canadian National Railway Co CNR CAD 71,751 11,986 43.98 20.62

CSX Corp CSX USD 41,168 10,813 29.37 24.63

Norfolk Southern Corp NSC USD 33,162 9,916 29.80 21.01

Canadian Pacific Railway Ltd CP CAD 29,470 6,282 40.40 19.96

spans the Western U.S., from the Pacific to theMississippi, capturing about half of the rail volume in theregion. UP has strength in hauling imports from Asiaarriving at busy West Coast ports, and in coal, as it stillhauls dozens of long trains daily southbound out ofWyoming's rich PRB. UP's rights of way and installed trackform a nearly impenetrable barrier to entry. The steepbarrier to entry formed by the need to obtain contiguousrights of way on which to lay continuously welded steelrail spanning a significant portion of a huge continentfends off would-be entrants. Railroads may build newspurs or restore abandoned lines, but we anticipate nonew mainlines will be built, given the massive barriers toentry.

Valuation Keith Schoonmaker, CFA, Sector Director, 22 January 2017

We increased our fair value estimate for Union Pacific to$113 from $100 per share, due to the time value of moneysince our last update. We believe the rail can produce a20% return on new invested capital and a 3.8% operatingearnings (before interest) growth rate. The former we baseon tempering the 36% five-year historical mean and 29%RONIC we project during the next five years, assumingnone of the operating ratio tailwind that produced theseimpressive values. The latter is a product of ourexpectation of about 2.75% price improvement per year(2% in intermodal and 3% elsewhere) and around 1%long-run volume expansion over a cycle.

We assume price improvement in 2017 of just 2% acrossthe board except for 0% in coal, then 3% broadly and 2%in intermodal and coal thereafter. Shifting our general 3%pricing power assumptions beyond 2017 to 2% per yearwould drop our valuation 3%.

Valuation is constrained by heavy reinvestment in UnionPacific's network. Management suggested that the firmcould demand capital expenditures as little as 15% ofsales in 2016-17 due to excess locomotives on hand anddeclining positive train control investments. We temperthis a bit to 17%, more in line with the past decade averageof 16.6% of sales, and note the firm invested more than17% only in 2012, 2014, and 2015. We model the sixcommodities UP reports in its financials for volume andrevenue per unit, and in 2016 we project volume willcontract 8%, followed by about 1.5% expansion per yearthereafter. We model coal to contract 21% during this yearand consolidated revenue per car to decline 2%-3% in

Morningstar Equity Analyst Report |Page 2 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

?

Page 3: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

2016 due to lower fuel surcharges, then to improve2%-3% per year on average thereafter.

We predicate our margin optimism on a series ofimpressive sub-70% OR quarters after the first quarter of2012 (and a record 60.3% in the third quarter of 2015). Inthe long run, we think UP can achieve at least 56% OR.We believe the rail will attain a 62% OR next year and56% by 2020.

Risk Keith Schoonmaker, CFA, Sector Director, 22 January 2017

Union Pacific is subject to weakness in the economy,particularly in industrial products. Because UP carriesmore chemicals than other rails, it is more subject to theliabilities associated with hazardous material spills.Regulation has potential to increase costs (via changes inhours of service rules or unfunded positive train controlmandates in safety bills) and constrain pricing. Coaldemand has been driven lower during the past couple ofyears as utilities substitute inexpensive natural gas, butPRB coal is cheaper than Central Appalachian or IllinoisBasin coal and positions UP well for a modest increase innatural gas rates.

Management Keith Schoonmaker, CFA, Sector Director, 05 December 2016

Overall, we consider Union Pacific's stewardship to besolid, and we have no material criticism of its governanceor use of shareholder resources.

UP's board elected Lance Fritz, 52, chairman, president,and CEO in 2015. Fritz has a solid history of leadershiproles within the firm, including COO, and we lack noconfidence in his ability. He served as executive vicepresident of operations from 2010 to 2014 and held theroles of vice president of labor relations, vice presidentof the southern region, vice president of the northernregion, and vice president and general manager of theenergy franchise. Fritz previously worked at Fiskars,Cooper Industries, and General Electric.

Rob Knight has been CFO since 2004 and helped engineerand drive the railroad's astonishing profitability progress:The company gained about 15 percentage points ofoperating margin in the past decade, culminating in arecord 63.1% operating ratio in 2015.

Railroad executives are well paid. During 2015, UP paid

Fritz total compensation of $10.1 million, principallycomposed of $966 thousand in cash salary, $2 million incash bonus, $6 million in stock and options, and $1 millionin pension and deferred compensation. The rail paid $5.8million of total compensation to Knight, $4.2 million tothen chief marketing officer Eric Butler, $3.7 million tocorporate secretary Diane Duren, and $2.9 million toexecutive vice president of operations Cameron Scott. InNovember 2016, UP appointed Butler as executive vicepresident and chief administrative officer and Beth Whitedas executive vice president and chief marketing officer.

Management set and achieved a series of operating ratiotargets during the past decade, and we doubt this teamis setting a goal the rail is unlikely to achieve. In late 2014,UP indicated it targets an OR of "60% plus or minus" by2019, but management has been conservative in declaringtargets publicly. We project salary and benefits as apercentage of revenue to cost 17% in the long run, versus21% in 2014. We believe the firm will make more efficientuse of manpower, a trend displayed since the railrenaissance began around 2004. Salaries and benefits arethe rail's greatest expense line, so this is a powerful lever.More recently, the firm has identified zero accidents anda 55% operating as long-run targets, but it didn't disclosethe timing of this stretch goal.

Morningstar Equity Analyst Report |Page 3 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 4: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Analyst Notes Archive

UNP Delivers Solid 62.1% Operating Ratio DespiteWeak Volume, but Core Price Gains Were WeakKeith Schoonmaker, CFA, Sector Director, 20 October 2016

Union Pacific produced a 62.1% third-quarter operatingratio, as carloads declined 6% and revenue dropped 7%;EPS slipped 9%. Coal and industrial volumes declined14% and 11%, respectively, but agriculture increased11%. International intermodal units were down 11% anddomestic down 2% (flat excluding the impact of NorfolkSouthern's discontinuing its Triple Crown product lastyear). However, total carloads improved 8% from thesecond quarter.

Most concerning to us is the mere 1.5% core priceimprovement. Management called out coal andinternational intermodal as particular price weak spots,but gave scant detail. Last year UP improved core price3.5% or 4% every quarter, but in 2016 just 2.5% in thefirst quarter and 2% in the second.

Pricing exceeding inflation is key to our valuation and UPindicated labor inflation was 3% this period. Managementexpects full-year labor inflation to run about 2% and 2016total inflation to be about 1.5%. For 2017, CFO Rob Knightindicated total inflation may exceed Global Insight’s 2.5%,but long run we expect 2.0%-2.5%.

This is a single quarter’s result, and, importantly, is stillan increase. It's also in line with management’s full-yearinflation expectations. Price is such a critical factor forthe rails because we expect slow net volume growth overthe long run (sub-GDP for most commodities, with coaldeclining and intermodal slowly expanding).

Should this low price improvement continue or inflationaccelerate, we will revisit our long-run pricingassumptions. For now, we lowered our price assumptionsfor 2017 from 3% to 2% across the board except for 0%in coal, then kept 3% broadly thereafter. However,offsetting this are the time value of money since our lastupdate, the beneficial impact of repurchases below ourfair value, and decreased capex in 2016-17. As a result,we increase our fair value estimate by 2% to $100.Shifting our 3% price assumptions beyond 2017 to 2%per year would drop our valuation 3%.

Trump's Election Increases Uncertainty onTransports, Especially Kansas City SouthernKeith Schoonmaker, CFA, Sector Director, 09 November 2016

Donald Trump’s victory in the U.S. presidential electionimplies some potential negatives for transports, butperhaps a long-run positive as well. We encourageinvestors to focus on fundamentals and use gyrations insentiment as potential buying opportunities forhigh-quality companies. At the fore, given Trump’scriticism of NAFTA and the Trans-Pacific Partnership, hiselection will cause near-term declines to railroads,especially those serving Mexico via NAFTA, as well as TPPbeneficiaries FedEx and UPS. Freight forwarders' growthcould be hindered as well if global exchange declines. Aminor winner among transports could be trucking ifhours-of-service regulations are relaxed; we view this aseven odds and maintain our current margin expectations.Movements may be short term indeed, and the marketoften overreacts to shocking news, like Brexit.

We maintain our high uncertainty rating for Kansas CitySouthern; other North American rails are medium—thedifference is exposure to Mexico. Kansas City Southernwins 40%-50% of revenue from its Mexican operationsand benefits tremendously from cross-border trade.Already around 35% of revenue, cross-border freight isalso the growth engine for the rail via both intermodal andautos. Autos could be most affected by Trump, andcomprise about 10% of revenue for both KCS and UP. UPwins about 10% of sales (we project $20 billion in 2016versus Kansas City Southern’s $2 billion total) haulingfreight to and from Mexico.

While the House and Senate will be majority Republican,many support free trade. The president may be able toalter tariffs and duties, but we think abolishing NAFTA isfar from certain, depending on Trump’s interactions withhis own party. We think renegotiations are more likely,perhaps including immigration as a factor. On the otherhand, with Trump in the White House and a RepublicanHouse and Senate, it may be the best chance in years toreduce the sky-high U.S. statutory tax rate.

Intermodal on Near-Term Slow Track, but WillRemain the Central Volume Driver for the Rails andIMCsMatthew Young, Eq. Analyst, 05 December 2016

Between 2010 and 2015, the rail-intermodal industryenjoyed double-digit revenue expansion, with noteworthy

Morningstar Equity Analyst Report |Page 4 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 5: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

help from truck-to-rail conversions on shorter-haul freightmoving less than 1,000 miles. Meaningful Class Iinfrastructure investment, shippers’ rising focus onslashing supply chain costs, and concerns over capacityconstraints in trucking all contributed. Over the past year,however, cheap diesel prices and more readily availabletruckload capacity linked to a pullback in shipmentdemand have spoiled the fun and are hamperingintermodal’s value proposition relative to trucking.

That said, investors have reason to be optimistic aboutintermodal’s prospects, especially considering thatcompeting truckload carriers will continue to grapple withcapacity-growth headwinds linked to new regulatoryrestrictions and the constrained driver pool. Said anotherway, intermodal's value as an alternative transportationoption won't disappear—we think the industry cangenerate mid-single-digit growth over the long run.

This is good news for the major intermodal marketingcompanies and Class I railroads, and our expectations forintermodal demand improvement over the next few yearsare reflected in our current fair value estimates. For therails, intermodal activity has outpaced carload growth formost other goods, and we believe it will be a core volumedriver going forward. Following a deep dive into railindustry trends we’ve modestly increase our volumegrowth assumptions for intermodal and certain industrialcommodities for the Class I rails, as well as our long-runearnings growth rate, and increased our fair valueestimates 1%-11%. From a valuation perspective, UnionPacific is our favorite rail benefiting from intermodalmarket growth, combining our view of its intermodalreturns and a few free cash flow metrics that lookattractive relative to other rails. On the other hand,market-implied assumptions for the IMCs have recentlybecome overly optimistic.

Hunter Harrison Departs CP, Apparently Interestedin Next Turnaround, Leaves CAD 118 Million BehindKeith Schoonmaker, CFA, Sector Director, 18 January 2017

Canadian Pacific announced that CEO Hunter Harrison,age 71, will depart the firm on vacation immediately untilhis long-time protege and credible successor Keith Creel,47, assumes the helm Jan. 31. This is about six monthsearlier than previously indicated, and Harrison will notconsult for CP thereafter, because he approached theboard to discuss modifications to his postemploymentagreement to pursue opportunities involving other Class

I railroads. The board agreed to waive his noncompeteobligation, but didn't waive his nonsolicitation obligationsconcerning senior CP employees. Harrison agreed to sellhis CP shares by the end of May. He forfeits CAD 118million worth of benefits and vested and unvested equityawards.

Our take is that CSX or Norfolk Southern are likely courtingHarrison to become a consultant, COO, or CEO to addresstheir lagging operating ratios. If pressed, we'd lean towardCSX simply because of Norfolk's vigorous refutation ofCP's merger advances in 2015, and because of the relativetime in office of the CEOs of CSX and Norfolk Southern.Michael Ward has served in the role since January2003--during the entire railroad renaissance, whereas JimSquires has led NS since June 2015. We admit this isspeculation on our part. Projecting what Harrison could doat the Eastern rails certainly has a wide cone ofuncertainty. They differ from his greatest successes whichwere at long, linear Canadian rails with significantunpopulated stretches, but if anyone can improve arailroad, our bet would be on Harrison. The market mayreward shares based on the possibility of his involvement.

On the other hand, we don't think this hurts CP at all. Creelwas already set to take over July 1, and we don't think heneeds consulting from Harrison or anyone else. He's beenHarrison's right-hand man for about 20 years, and has ledoperations at CN and CP for many years. We don't expectthe market to punish CP for pulling forward along-telegraphed transition.

UP Still Produces Outstanding Operating Ratio andFree Cash Flow Margins Despite Weak VolumesKeith Schoonmaker, CFA, Sector Director, 22 January 2017

Union Pacific fourth-quarter carloads declined 3%,dropping in five of six reported freight commodities--onlyagriculture improved year on year (a strong 8%). The railimproved its operating ratio 1.2 basis points to 62.0% tocomplete the full year at 63.5%. After incorporating 2016results and updating our near-term projections, weincreased our fair value estimate by $3 per share to $113chiefly due to lower budgeted 2017 capital expenditureand the time value of money.

Coal volume declined 9% from the prior-year period--16%lower in the Powder River Basin offset by 24%improvement from other regions. Chemical carloads wereup 1% excluding the 71% decline in crude. We're

Morningstar Equity Analyst Report |Page 5 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 6: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

impressed with UP's $4 billion of free cash flow(industry-leading 20% of sales). The firm deployed thisplus $1 billion more on dividends and share repurchases.Even with weak volumes, UP gushes cash.

Low 1% core price improvement was the lowest in adecade, and last quarter was weak too. What is essentialis to grow price dollars greater than inflation dollars overthe long run (inflation was 1.5% this quarter), and webelieve UP can accomplish this even if some quarters facestronger competitive forces than others. In fact,management indicates that core price improved 2%-3%,excluding intermodal and coal.

Looking forward, management guides to a low-single-digitvolume increase in 2017, with improvement in coal,domestic intermodal, and agriculture, and is confident inits ability to improve OR from this year's 63.5% via volume,pricing, and productivity improvements. This sets the firmon track toward achieving it's "60% plus or minus" targetby 2019 and mid 50s longer term. We expect coal toimprove during the first half of 2017 as inventories areslightly lower than last year, though still historically high,because more gas is more expensive than it was last year.Henry Hub is currently around $3.40 per MMBTU versus$2 or lower for 2016 rates; we anticipate coal demandwill benefit.

Morningstar Equity Analyst Report |Page 6 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 7: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Union Pacific Corp UNP QQQQ 22 Jan 2017 02:00 UTC

Last Close Fair ValueQ Market Cap Sector Industry Country of Domicile20 Jan 2017 22 Jan 2017 02:00 UTC 20 Jan 2017

108.60 105.14 88,456.1 Mil p Industrials Railroads USA United States

There is no one analyst in which a Quantitative Fair Value Estimate and QuantitativeStar Rating are attributed to; however, Mr. Lee Davidson, Head of QuantitativeResearch for Morningstar, Inc., is responsible for overseeing the methodology thatsupports the quantitative fair value. As an employee of Morningstar, Inc., Mr.Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal SecuritiesTrading Policy in carrying out his responsibilities. For information regarding Conflictsof Interests, visit http://global.morningstar.com/equitydisclosures

Company ProfileUnion Pacific Corp is a rail transporting company. Its operatingcompany is Union Pacific Railroad Company. It links 23 statesin the western two-thirds of the country by rail.

Quantitative Scores Scores

All Rel Sector Rel Country

Quantitative Moat Wide 100 100 100Valuation Fairly Valued 40 46 48Quantitative Uncertainty Low 100 100 99Financial Health Moderate 76 72 76

Source: Morningstar Equity Research

pUSA

UNP

Undervalued Fairly Valued Overvalued

ValuationCurrent 5-Yr Avg

SectorMedian

CountryMedian

Price/Quant Fair Value 1.03 0.97 1.02 1.02Price/Earnings 21.8 17.5 19.3 22.4Forward P/E 19.5 — 16.6 16.8Price/Cash Flow 12.7 11.2 10.3 12.9Price/Free Cash Flow 28.1 27.0 16.6 19.3Trailing Dividend Yield % 2.08 2.06 2.20 1.93Price/Book 4.4 3.7 1.8 2.5Price/Sales 4.6 3.5 1.0 2.1

ProfitabilityCurrent 5-Yr Avg

SectorMedian

CountryMedian

Return on Equity % 20.6 21.4 11.0 11.9Return on Assets % 7.6 8.8 4.5 4.6Revenue/Employee (K) 421.0 466.5 463.3 305.6

Financial HealthCurrent 5-Yr Avg

SectorMedian

CountryMedian

Distance to Default 0.7 0.7 0.6 0.5Solvency Score 399.1 — 504.0 585.4Assets/Equity 2.6 2.5 1.8 1.7Long-Term Debt/Equity 0.7 0.5 0.2 0.3

Price vs. Quantitative Fair Value

32

64

96

128

160

2013 2014 2015 2016 2017 2018 Quantitative Fair Value EstimateTotal ReturnSales/ShareForecast RangeForcasted PriceDividendSplit

Momentum: PositiveStandard Deviation: 20.63Liquidity: High

68.66 52-Wk 108.98

52.04 5-Yr 124.52

36.0 44.1 -32.5 35.5 4.7 Total Return %2.9 31.2 -33.2 23.0 3.2 +/– Market (Morningstar US Index)

1.76 1.60 2.81 2.17 — Trailing Dividend Yield %— — — — 2.08 Forward Dividend Yield %

18.5 22.0 13.5 20.8 21.8 Price/Earnings3.6 4.6 3.0 4.4 4.6 Price/Revenue

Morningstar RatingQ

QQQQQQQQQQQQQQQ

2011 2012 2013 2014 2015 TTM Financials (Fiscal Year in Mil)19,557 20,926 21,963 23,988 21,813 19,981 Revenue

15.3 7.0 5.0 9.2 -9.1 -8.4 % Change

5,724 6,745 7,446 8,753 8,052 7,225 Operating Income14.9 17.8 10.4 17.6 -8.0 -10.3 % Change

3,292 3,943 4,388 5,180 4,772 4,206 Net Income

5,873 6,161 6,823 7,385 7,344 7,186 Operating Cash Flow-3,261 -4,012 -3,496 -4,346 -4,650 -3,931 Capital Spending2,612 2,149 3,327 3,039 2,694 3,255 Free Cash Flow

13.4 10.3 15.1 12.7 12.4 16.3 % Sales

3.36 4.14 4.71 5.75 5.49 4.99 EPS21.5 23.1 13.9 22.1 -4.5 -9.1 % Change2.66 2.26 3.33 3.53 3.65 3.86 Free Cash Flow/Share

0.97 1.25 1.48 1.91 2.20 2.20 Dividends/Share19.34 21.17 22.78 24.40 24.26 24.61 Book Value/Share

912,002 883,366 849,211 814,512 — 814,512 Shares Outstanding (K)

Profitability18.1 20.5 21.4 24.4 22.8 20.6 Return on Equity %

7.5 8.6 9.1 10.1 8.9 7.6 Return on Assets %16.8 18.8 20.0 21.6 21.9 21.1 Net Margin %0.44 0.45 0.45 0.47 0.41 0.36 Asset Turnover

2.4 2.4 2.3 2.5 2.6 2.8 Financial Leverage

65.5 66.8 67.8 69.4 74.0 75.3 Gross Margin %29.3 32.2 33.9 36.5 36.9 36.2 Operating Margin %

8,697 8,801 8,872 11,018 13,607 15,205 Long-Term Debt

18,578 19,877 21,225 21,189 20,702 20,284 Total Equity0.5 0.5 0.5 0.5 0.5 0.4 Fixed Asset Turns

Growth Per Share1-Year 3-Year 5-Year 10-Year

Revenue % -9.1 1.4 5.2 4.9Operating Income % -8.0 6.1 10.1 16.2Earnings % -4.5 9.9 14.7 19.0Dividends % 15.2 20.9 27.4 22.1Book Value % 1.6 4.8 6.2 6.6Stock Total Return % 50.6 11.1 15.8 17.5

Quarterly Revenue & EPSRevenue (Mil) Mar Jun Sep Dec Total2016 4,829.0 4,770.0 5,174.0 — —2015 5,614.0 5,429.0 5,562.0 5,208.0 21,813.02014 5,638.0 6,015.0 6,182.0 6,153.0 23,988.02013 5,290.0 5,470.0 5,573.0 5,630.0 21,963.0Earnings Per Share ()2016 1.16 1.17 1.36 — —2015 1.30 1.38 1.50 1.31 5.492014 1.19 1.43 1.53 1.61 5.752013 1.02 1.19 1.24 1.27 4.71

Revenue Growth Year On Year %

10.9 9.3

-0.4

-9.7 -10.0

-15.4 -14.0 -12.1

-7.0

2014 2015 2016

Quantitative Equity Report | Release: 22 Jan 2017, 16:55, GMT-06:00 | Reporting Currency: USD | Trading Currency: USD | Exchange:XNYS

© Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses andopinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore is not an offer to buy or sell a security; are not warranted to be correct, complete or accurate; andare subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data,analyses or opinions or their use. The information herein may not be reproduced, in any manner without the prior written consent of Morningstar. Please see important disclosures at the end of this report.

ß®

Page 1 of 1Page 7 of 14

Page 8: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Research Methodology for Valuing Companies

Qualitative Equity Research Overview

At the heart of our valuation system is a detailed projection of a company’s future cash flows, re-sulting from our analysts’ research. Analysts cre-ate custom industry and company assumptions to feed income statement, balance sheet, and capital investment assumptions into our globally standardized, proprietary discounted cash flow, or DCF, modeling templates. We use scenario analysis, in-depth competitive advantage analy-sis, and a variety of other analytical tools to aug-ment this process. Moreover, we think analyzing valuation through discounted cash flows pres-ents a better lens for viewing cyclical companies, high-growth firms, businesses with finite lives (e.g., mines), or companies expected to generate negative earnings over the next few years. That said, we don’t dismiss multiples altogether but rather use them as supporting cross-checks for our DCF-based fair value estimates. We also ac-knowledge that DCF models offer their own chal-lenges (including a potential proliferation of esti-mated inputs and the possibility that the method may miss short-term market-price movements), but we believe these negatives are mitigated by deep analysis and our long-term approach.

Morningstar’s equity research group (“we”, “our”) believes that a company’s intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth—or fair value estimate, in Morn-ingstar terminology. Five-star stocks sell for the biggest risk-adjusted discount to their fair values, whereas 1-star stocks trade at premiums to their intrinsic worth.

Four key components drive the Morningstar rat-ing: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate

and (4) the current market price. This process ultimately culminates in our single-point star rating.

1. Economic Moat

The concept of an economic moat plays a vital role not only in our qualitative assessment of a firm’s long-term investment potential, but also in the actual calculation of our fair value estimates. An economic moat is a structural feature that allows a firm to sustain excess profits over a long period of time. We define economic profits as returns on invested capital (or ROIC) over and above our estimate of a firm’s cost of capital, or weight-ed average cost of capital (or WACC). Without a moat, profits are more susceptible to competition. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale.

Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the next 10 years. Wide-moat com-panies are those in which we have very high confi-dence that excess returns will remain for 10 years, with excess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe low-quality, no-moat companies will see their normalized returns gravitate toward the firm’s cost of capital more quickly than companies with moats.

To assess the sustainability of excess profits, analysts perform ongoing assessments of the moat trend. A firm’s moat trend is positive in cases where we think its sources of competitive advantage are growing stron-ger; stable where we don’t anticipate changes to com-petitive advantages over the next several years; or neg-ative when we see signs of deterioration.

2. Estimated Fair Value

Combining our analysts’ financial forecasts with the firm’s economic moat helps us assess how long returns on invested capital are likely to exceed the firm’s cost of

Margin of Safety

Market Pricing

Morningstar Fair Value Morningstar RatingTM For Stocks QQQQQ

StewardshipUncertainty

Economic MoatFinancial Health

Moat Trend

Morningstar Research Methodology for Valuing Companies

capital. Returns of firms with a wide economic moat rat-ing are assumed to fade to the perpetuity period over a longer period of time than the returns of narrow-moat firms, and both will fade slower than no-moat firms, in-creasing our estimate of their intrinsic value.

Our model is divided into three distinct stages:

Stage I: Explicit Forecast In this stage, which can last five to 10 years, analysts make full financial statement forecasts, including items such as revenue, profit margins, tax rates, changes in working-capital accounts, and capital spending. Based on these projections, we calculate earnings before in-terest, after taxes (EBI) and the net new investment (NNI) to derive our annual free cash flow forecast.

Stage II: Fade The second stage of our model is the period it will take the company’s return on new invested capital—the re-turn on capital of the next dollar invested (“RONIC”)—to decline (or rise) to its cost of capital. During the Stage II period, we use a formula to approximate cash flows in lieu of explicitly modeling the income statement, bal-ance sheet, and cash flow statement as we do in Stage I. The length of the second stage depends on the strength of the company’s economic moat. We forecast this period to last anywhere from one year (for compa-nies with no economic moat) to 10–15 years or more (for wide-moat companies). During this period, cash flows are forecast using four assumptions: an average growth rate for EBI over the period, a normalized investment rate, average return on new invested capital (RONIC), and the number of years until perpetuity, when excess returns cease. The investment rate and return on new invested capital decline until a perpetuity value is calcu-lated. In the case of firms that do not earn their cost of capital, we assume marginal ROICs rise to the firm’s cost of capital (usually attributable to less reinvestment), and we may truncate the second stage.

Stage III: Perpetuity Once a company’s marginal ROIC hits its cost of capital, we calculate a continuing value, using a standard per-petuity formula. At perpetuity, we assume that any growth or decline or investment in the business neither creates nor destroys value and that any new investment provides a return in line with estimated WACC.

Because a dollar earned today is worth more than a dol-lar earned tomorrow, we discount our projections of cash flows in stages I, II, and III to arrive at a total pres-

Morningstar Equity Analyst Report |Page 8 of 14

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 9: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Research Methodology for Valuing Companies

ent value of expected future cash flows. Because we are modeling free cash flow to the firm—rep-resenting cash available to provide a return to all capital providers—we discount future cash flows using the WACC, which is a weighted aver-age of the costs of equity, debt, and preferred stock (and any other funding sources), using ex-pected future proportionate long-term, market-value weights.

3. Uncertainty around that fair value estimate

Morningstar’s Uncertainty Rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin of safe-ty required before investing, which in turn explic-itly drives our stock star rating system. The Un-certainty Rating represents the analysts’ ability to bound the estimated value of the shares in a company around the Fair Value Estimate, based on the characteristics of the business underlying the stock, including operating and financial lever-age, sales sensitivity to the overall economy, product concentration, pricing power, and other company-specific factors.

Analysts consider at least two scenarios in addi-tion to their base case: a bull case and a bear case. Assumptions are chosen such that the ana-lyst believes there is a 25% probability that the company will perform better than the bull case, and a 25% probability that the company will per-form worse than the bear case. The distance be-tween the bull and bear cases is an important in-dicator of the uncertainty underlying the fair value estimate.

Our recommended margin of safety widens as our uncertainty of the estimated value of the eq-uity increases. The more uncertain we are about the estimated value of the equity, the greater the discount we require relative to our estimate of the value of the firm before we would recom-mend the purchase of the shares. In addition, the uncertainty rating provides guidance in portfolio construction based on risk tolerance.

Our uncertainty ratings for our qualitative analysis are low, medium, high, very high, and extreme.

3Low: margin of safety for 5-star rating is a 20% discount and for 1-star rating is 25% premium.

Price/Fair Value

2.75

2.25

1.75

1.25

0.75

0.25

* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.

• 5 Star

• 4 Star

• 3 Star

• 2 Star

• 1 Star

Low

125%

105%95%

80%

Medium

135%

110%

90%

70%—

High

155%

115%

85%

60%

Very High*

175%

125%

80%

50%

Morningstar Research Methodology for Valuing Companies

3Medium: margin of safety for 5-star rating is a 30% discount and for 1-star rating is 35% premium. 3High: margin of safety for 5-star rating is a 40% discount and for 1-star rating is 55% premium. 3Very High: margin of safety for 5-star rating is a 50% discount and for 1-star rating is 75% premium. 3Extreme: Stock’s uncertainty exceeds the parameters we have set for assigning the appropriate margin of safety.

4. Market Price

The market prices used in this analysis and noted in the report come from exchange on which the stock is listed which we believe is a reliable source.

For more detail information about our methodology, please go to http://global.morningstar.com/equitydisclosures

Morningstar Star Rating for Stocks

Once we determine the fair value estimate of a stock, we compare it with the stock’s current market price on a daily basis, and the star rating is automatically re-cal-culated at the market close on every day the market on which the stock is listed is open. Our analysts keep close tabs on the companies they follow, and, based on thorough and ongoing analysis, raise or lower their fair value estimates as warranted.

Please note, there is no predefined distribution of stars. That is, the percentage of stocks that earn 5 stars can fluctuate daily, so the star ratings, in the aggregate, can serve as a gauge of the broader market’s valuation. When there are many 5-star stocks, the stock market as

a whole is more undervalued, in our opinion, than when very few companies garner our highest rating.

We expect that if our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years (although it is impossible to predict the exact time frame in which market prices may adjust).

Our star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, tax situation, time horizon, in- come needs, and complete investment portfolio, among other factors.

The Morningstar Star Ratings for stocks are defined below:

Five Stars QQQQQ We believe appreciation beyond a fair risk-adjusted re-turn is highly likely over a multiyear time frame. Scenar-io analysis developed by our analysts indicates that the current market price represents an excessively pessi-mistic outlook, limiting downside risk and maximizing upside potential.

Four Stars QQQQWe believe appreciation beyond a fair risk-adjusted re-turn is likely.

Three Stars QQQIndicates our belief that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).

Morningstar Equity Analyst Report |Page 9 of 14

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 10: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Research Methodology for Valuing Companies

Two Stars QQWe believe investors are likely to receive a less than fair risk-adjusted return.

One Star QIndicates a high probability of undesirable risk-adjusted returns from the current market price over a multiyear time frame, based on our analy-sis. Scenario analysis by our analysts indicates that the market is pricing in an excessively opti-mistic outlook, limiting upside potential and leav-ing the investor exposed to Capital loss.

Other Definitions:

Last Price: Price of the stock as of the close of the market of the last trading day before date of the report.

Stewardship Rating: Represents our assessment of management’s stewardship of shareholder capital, with particular emphasis on capital allo-cation decisions. Analysts consider companies’ investment strategy and valuation, financial le-verage, dividend and share buyback policies, ex-ecution, compensation, related party transac-tions, and accounting practices. Corporate governance practices are only considered if they’ve had a demonstrated impact on share-holder value. Analysts assign one of three rat-ings: “Exemplary,” “Standard,” and “Poor.” Ana-lysts judge stewardship from an equity holder’s perspective. Ratings are determined on an abso-lute basis. Most companies will receive a Standard rating, and this is the default rating in the absence of evidence that managers have made exceptionally strong or poor capital allocation decisions.

Quantitative Valuation: Using the below terms, intended to denote the relationship between the security’s Last Price and Morningstar’s quantita-tive fair value estimate for that security.

3Undervalued: Last Price is below Morningstar’s quantitative fair value estimate. 3Farily Valued: Last Price is in line with Morning-star’s quantitative fair value estimate. 3Overvalued: Last Price is above Morningstar’s quantitative fair value estimate.

Risk Warning

Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indication of future performance. A security investment return and an in-vestor’s principal value will fluctuate so that, when re-deemed, an investor’s shares may be worth more or less than their original cost. A security’s current invest-ment performance may be lower or higher than the in-vestment performance noted within the report. Morn-ingstar’s Uncertainty Rating serves as a useful data point with respect to sensitivity analysis of the assump-tions used in our determining a fair value price.

Quantitative Equity Reports Overview

The quantitative report on equities consists of data, sta-tistics and quantitative equity ratings on equity securi-ties. Morningstar, Inc.’s quantitative equity ratings are forward looking and are generated by a statistical mod-el that is based on Morningstar Inc.’s analyst-driven equity ratings and quantitative statistics. Given the na-ture of the quantitative report and the quantitative rat-ings, there is no one analyst in which a given report is attributed to; however, Mr. Lee Davidson, Head of Quantitative Research for Morningstar, Inc., is respon-sible for overseeing the methodology that supports the quantitative equity ratings used in this report. As an employee of Morningstar, Inc., Mr. Davidson is guided by Morningstar, Inc.’s Code of Ethics and Personal Se-curities Trading Policy in carrying out his responsibilities.

Quantitative Equity Ratings

Morningstar’s quantitative equity ratings consist of: (i) Quantitative Fair Value Estimate, (ii) Quantitative Star Rating, (iii) Quantitative Uncertainty, (iv) Quantitative Economic Moat, and (v) Quantitative Financial Health (collectively the “Quantitative Ratings).

The Quantitative Ratings are calculated daily and de-rived from the analyst-driven ratings of a company’s peers as determined by statistical algorithms. Morning-star, Inc. (“Morningstar”, “we”, “our”) calculates Quan-titative Ratings for companies whether or not it already provides analyst ratings and qualitative coverage. In some cases, the Quantitative Ratings may differ from the analyst ratings because a company’s analyst-driven ratings can significantly differ from other companies in its peer group.

Quantitative Fair Value Estimate: Intended to represent Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. Morningstar calculates the Quantitative Fair Value Estimate using a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies. Please go to http://global.morningstar.com/equitydis-closures for information about Fair Value Estimate Morningstar’s equity analysts assign to companies.

Quantitative Economic Moat: Intended to describe the strength of a firm’s competitive position. It is calculated using an algorithm designed to predict the Economic Moat rating a Morningstar analyst would assign to the stock. The rating is expressed as Narrow, Wide, or None.

3Narrow: assigned when the probability of a stock receiv-ing a “Wide Moat” rating by an analyst is greater than 70% but less than 99%. 3Wide: assigned when the probability of a stock receiving a “Wide Moat” rating by an analyst is greater than 99%. 3None: assigned when the probability of an analyst receiv-ing a “Wide Moat” rating by an analyst is less than 70%.

Quantitative Star Rating: Intended to be the summary rating based on the combination of our Quantitative Fair Value Estimate, current market price, and the Quantita-tive Uncertainty Rating. The rating is expressed as One-Star, Two-Star, Three-Star, Four-Star, and Five-Star.

3One-Star: the stock is overvalued with a reasonable mar-gin of safety. Log (Quant FVE/Price) < -1*Quantitative Uncertainty 3Two-Star: the stock is somewhat overvalued.Log (Quant FVE/Price) between (-1*Quantitative Uncertainty, -0.5*Quantitative Uncertainty) 3Three-Star: the stock is approximately fairly valued.Log (Quant FVE/Price) between (-0.5*Quantitative Uncertainty, 0.5*Quantitative Uncertainty) 3Four-Star: the stock is somewhat undervalued.Log (Quant FVE/Price) between (0.5*Quantitative Uncertainty, 1*Quantitative Uncertainty) 3Five-Star: the stock is undervalued with a reasonable margin of safety. Log (Quant FVE/Price) > 1*Quantitative Uncertainty

Quantitative Uncertainty: Intended to represent Morn-ingstar’s level of uncertainty about the accuracy of the Quantitative Fair Value Estimate. Generally, the lower the Quantitative Uncertainty, the narrower the potential range of outcomes for that particular company. The rat-

Morningstar Equity Analyst Report |Page 10 of 14

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 11: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Research Methodology for Valuing Companies

ing is expressed as Low, Medium, High, Very High, and Extreme.

3Low: the interquartile range for possible fair val-ues is less than 10%. 3Medium: the interquartile range for possible fair values is less than 15% but greater than 10%. 3High: the interquartile range for possible fair val-ues is less than 35% but greater than 15%. 3Very High: the interquartile range for possible fair values is less than 80% but greater than 35%. 3Extreme: the interquartile range for possible fair values is greater than 80%.

Quantitative Financial Health: Intended to reflect the probability that a firm will face financial dis-tress in the near future. The calculation uses a predictive model designed to anticipate when a company may default on its financial obliga-tions. The rating is expressed as Weak, Moderate, and Strong.

3Weak: assigned when Quantitative Financial Health < 0.2 3Moderate: assigned when Quantitative Financial Health is between 0.2 and 0.7 3Strong: assigned when Quantitative Financial Health > 0.7

Other Definitions:

Last Close: Price of the stock as of the close of the mar-ket of the last trading day before date of the report.

Quantitative Valuation: Using the below terms, intend-ed to denote the relationship between the security’s Last Price and Morningstar’s quantitative fair value es-timate for that security.

3Undervalued: Last Price is below Morningstar’s quanti-tative fair value estimate. 3Farily Valued: Last Price is in line with Morningstar’s quantitative fair value estimate. 3Overvalued: Last Price is above Morningstar’s quantita-tive fair value estimate.

This Report has not been made available to the issuer of the security prior to publication.

Risk Warning

Please note that investments in securities are subject to market and other risks and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in future and is no indication of future performance. A security investment return and an in-vestor’s principal value will fluctuate so that, when re-deemed, an investor’s shares may be worth more or less than their original cost. A security’s current investment performance may be lower or higher than the invest-ment performance noted within the report.

The quantitative equity ratings are not statements of fact. Morningstar does not guarantee the completeness or accuracy of the assumptions or models used in deter-mining the quantitative equity ratings. In addition, there is the risk that the price target will not be met due to such things as unforeseen changes in demand for the company’s products, changes in management, technol-ogy, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, and tax rate. For invest-ments in foreign markets there are further risks, gener-ally based on exchange rate changes or changes in po-litical and social conditions. A change in the fundamental factors underlying the quantitative equity ratings can mean that the valuation is subsequently no longer accurate.

For more information about Morningstar’s quantitative methodology, please visit www.corporate.morningstar.com.

Morningstar Equity Analyst Report |Page 11 of 14

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.

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Page 12: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

General DisclosureThe analysis within this report is prepared by the person(s) noted in their capacity as an analyst for Morningstar’sequity research group. The equity research groupconsists of various Morningstar, Inc. subsidiaries(“Equity Research Group)”. In the United States, thatsubsidiary is Morningstar Research Services LLC, whichis registered with and governed by the U.S. Securitiesand Exchange Commission.

The opinions expressed within the report are given ingood faith, are as of the date of the report and aresubject to change without notice. Neither the analystnor Equity Research Group commits themselves inadvance to whether and in which intervals updates tothe report are expected to be made. The written analysisand Morningstar Star Rating for stocks are statementsof opinions; they are not statements of fact.

The Equity Research Group believes its analysts makea reasonable effort to carefully research informationcontained in the analysis. The information on which theanalysis is based has been obtained from sourcesbelieved to be reliable such as, for example, thecompany’s financial statements filed with a regulator,company website, Bloomberg and any other therelevant press sources. Only the information obtainedfrom such sources is made available to the issuer whois the subject of the analysis, which is necessary toproperly reconcile with the facts. Should this sharing ofinformation result in considerable changes, a statementof that fact will be noted within the report. While theEquity Research Group has obtained data, statistics andinformation from sources it believes to be reliable,neither the Equity Research Group nor Morningstar, Inc.performs an audit or seeks independent verification ofany of the data, statistics, and information it receives.

General Quantitative DisclosureThe Quantitative Equity Report (“Report”) is derivedfrom data, statistics and information withinMorningstar, Inc.’s database as of the date of the Reportand is subject to change without notice. The Report isfor informational purposes only, intended for financialprofessionals and/or sophisticated investors (“Users”)and should not be the sole piece of information used bysuch Users or their clients in making an investmentdecision. The quantitative equity ratings noted theReport are provided in good faith, are as of the date of

the Report and are subject to change. WhileMorningstar has obtained data, statistics andinformation from sources it believes to be reliable,Morningstar does not perform an audit or seeksindependent verification of any of the data, statistics,and information it receives.

The quantitative equity ratings are not a market call,and do not replace the User or User’s clients fromconducting their own due-diligence on the security. Thequantitative equity rating is not a suitabilityassessment; such assessments take into account mayfactors including a person’s investment objective,personal and financial situation, and risk tolerance allof which are factors the quantitative equity ratingstatistical model does not and did not consider.

Prices noted with the Report are the closing prices onthe last stock-market trading day before the publicationdate stated, unless another point in time is explicitlystated.

General Disclosure (applicable to both Quantitativeand Qualitative Research)Unless otherwise provided in a separate agreement,recipients accessing this report may only use it in thecountry in which the Morningstar distributor is based.Unless stated otherwise, the original distributor of thereport is Morningstar Research Services LLC, a U.S.A.domiciled financial institution.

This report is for informational purposes only and hasno regard to the specific investment objectives,

financial situation or particular needs of any specificrecipient. This publication is intended to provideinformation to assist institutional investors in makingtheir own investment decisions, not to provideinvestment advice to any specific investor. Therefore,investments discussed and recommendations madeherein may not be suitable for all investors: recipientsmust exercise their own independent judgment as tothe suitability of such investments and recommendationsin the light of their own investment objectives,experience, taxation status and financial position.

The information, data, analyses and opinions presentedherein are not warranted to be accurate, correct,complete or timely. Unless otherwise provided in aseparate agreement, neither Morningstar, Inc. or theEquity Research Group represents that the reportcontents meet all of the presentation and/or disclosurestandards applicable in the jurisdiction the recipient islocated.

Except as otherwise required by law or provided for ina separate agreement, the analyst, Morningstar, Inc.and the Equity Research Group and their officers,directors and employees shall not be responsible orliable for any trading decisions, damages or otherlosses resulting from, or related to, the information,data, analyses or opinions within the report. The EquityResearch Group encourages recipients of this report toread all relevant issue documents (e.g., prospectus)pertaining to the security concerned, including withoutlimitation, information relevant to its investmentobjectives, risks, and costs before making an

Morningstar Equity Analyst Report |Page 12 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869.

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Page 13: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

investment decision and when deemed necessary, toseek the advice of a legal, tax, and/or accountingprofessional.

The Report and its contents are not directed to, orintended for distribution to or use by, any person orentity who is a citizen or resident of or located in anylocality, state, country or other jurisdiction where suchdistribution, publication, availability or use would becontrary to law or regulation or which would subjectMorningstar, Inc. or its affiliates to any registration orlicensing requirements in such jurisdiction.

Where this report is made available in a language otherthan English and in the case of inconsistencies betweenthe English and translated versions of the report, theEnglish version will control and supersede anyambiguities associated with any part or section of areport that has been issued in a foreign language.Neither the analyst, Morningstar, Inc., or the EquityResearch Group guarantees the accuracy of thetranslations.

This report may be distributed in certain localities,countries and/or jurisdictions (“Territories”) byindependent third parties or independent intermediariesand/or distributors (“Distributors”). Such Distributorsare not acting as agents or representatives of theanalyst, Morningstar, Inc. or the Equity Research Group.In Territories where a Distributor distributes our report,the Distributor is solely responsible for complying withall applicable regulations, laws, rules, circulars, codesand guidelines established by local and/or regionalregulatory bodies, including laws in connection with thedistribution third-party research reports.

Conflicts of Interest:

• No interests are held by the analyst with respect tothe security subject of this investment research report.– Morningstar, Inc. may hold a long position in thesecurity subject of this investment research report thatexceeds 0.5% of the total issued share capital of thesecurity. To determine if such is the case, please clickhttp://msi.morningstar.com and http://mdi.morningstar.com.

• Analysts' compensation is derived from Morningstar,Inc.'s overall earnings and consists of salary, bonus andin some cases restricted stock.

• Neither Morningstar, Inc. or the Equity ResearchGroup receives commissions for providing research nordo they charge companies to be rated.

• Neither Morningstar, Inc. or the Equity ResearchGroup is a market maker or a liquidity provider of thesecurity noted within this report.

• Neither Morningstar, Inc. or the Equity ResearchGroup has been a lead manager or co-lead managerover the previous 12-months of any publicly disclosedoffer of financial instruments of the issuer.

• Morningstar, Inc.’s investment management groupdoes have arrangements with financial institutions toprovide portfolio management/investment advice someof which an analyst may issue investment researchreports on. However, analysts do not have authority overMorningstar's investment management group'sbusiness arrangements nor allow employees from theinvestment management group to participate orinfluence the analysis or opinion prepared by them.

• Morningstar, Inc. is a publically traded company(Ticker Symbol: MORN) and thus a financial institutionthe security of which is the subject of this report mayown more than 5% of Morningstar, Inc.’s totaloutstanding shares. Please access Morningstar, Inc.’sproxy statement, “Security Ownership of CertainBeneficial Owners and Management” sectionhttp://investorrelations.morningstar.com/sec.cfm?doc­type=Proxy&year=&x=12

• Morningstar, Inc. may provide the product issuer orits related entities with services or products for a feeand on an arms’ length basis including softwareproducts and licenses, research and consultingservices, data services, licenses to republish our ratingsand research in their promotional material, eventsponsorship and website advertising.

Further information on Morningstar, Inc.'s conflict ofinterest policies is available from http://global.mornin­gstar.com/equitydisclosures. Also, please note analystsare subject to the CFA Institute’s Code of Ethics andStandards of Professional Conduct.

For a list of securities which the Equity Research Group

currently covers and provides written analysis onplease contact your local Morningstar office. Inaddition, for historical analysis of securities covered,including their fair value estimate, please contact yourlocal office.

For Recipients in Australia: This Report has beenissued and distributed in Australia by MorningstarAustralasia Pty Ltd (ABN: 95 090 665 544; ASFL:240892). Morningstar Australasia Pty Ltd is the providerof the general advice (‘the Service’) and takesresponsibility for the production of this report. TheService is provided through the research of investmentproducts. To the extent the Report contains generaladvice it has been prepared without reference to aninvestor’s objectives, financial situation or needs.Investors should consider the advice in light of thesematters and, if applicable, the relevant ProductDisclosure Statement before making any decision toinvest. Refer to our Financial Services Guide (FSG) formore information at http://www.morningstar.com.au/fsg.pdf.

For Recipients in Hong Kong: The Report isdistributed by Morningstar Investment ManagementAsia Limited, which is regulated by the Hong KongSecurities and Futures Commission to provide servicesto professional investors only. Neither MorningstarInvestment Management Asia Limited, nor itsrepresentatives, are acting or will be deemed to beacting as an investment advisor to any recipients of thisinformation unless expressly agreed to by MorningstarInvestment Management Asia Limited. For enquiriesregarding this research, please contact a MorningstarInvestment Management Asia Limited LicensedRepresentative at http://global.morningstar.com/equi­tydisclosures .

For Recipients in India: This Investment Research isissued by Morningstar Investment Adviser India PrivateLimited. Morningstar Investment Adviser India PrivateLimited is registered with the Securities and ExchangeBoard of India (Registration number INA000001357)and provides investment advice and research.Morningstar Investment Adviser India Private Limitedhas not been the subject of any disciplinary action bySEBI or any other legal/regulatory body. MorningstarInvestment Adviser India Private Limited is a whollyowned subsidiary of Morningstar Investment

Morningstar Equity Analyst Report |Page 13 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869.

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Page 14: Union Pacific Corp UNP (XNYS) - Washburn UniversityUnion Pacific is a massive railroad, and it's getting bigger and even better. Success followed a couple of decades after partial

Management LLC. In India, Morningstar InvestmentAdviser India Private Limited has one associate,Morningstar India Private Limited, which provides datarelated services, financial data analysis and softwaredevelopment.

The Research Analyst has not served as an officer,director or employee of the fund company within thelast 12 months, nor has it or its associates engaged inmarket making activity for the fund company.

*The Conflicts of Interest disclosure above also appliesto relatives and associates of Manager ResearchAnalysts in India # The Conflicts of Interest disclosureabove also applies to associates of Manager ResearchAnalysts in India. The terms and conditions on whichMorningstar Investment Adviser India Private Limitedoffers Investment Research to clients, varies from clientto client, and are detailed in the respective clientagreement.

For recipients in Japan: The Report is distributed byIbbotson Associates Japan, Inc., which is regulated byFinancial Services Agency. Neither Ibbotson AssociatesJapan, Inc., nor its representatives, are acting or willbe deemed to be acting as an investment advisor to anyrecipients of this information.

For recipients in Singapore: For Institutional Investoraudiences only. Recipients of this report should contacttheir financial adviser in Singapore in relation to thisreport. Morningstar, Inc., and its affiliates, relies oncertain exemptions (Financial Advisers Regulations,Section 32B and 32C) to provide its investment researchto recipients in Singapore.

Morningstar Equity Analyst Report |Page 14 of 14

Union Pacific Corp UNP (XNYS)Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Stewardship

22 Jan 201722:39, UTC

22 Jan 2017 22 Jan 201722:36, UTC

20 Jan 2017 20 Jan 2017 20 Jan 2017QQQ 108.60 USD 113.00 USD 0.96 2.08 2.23 88.46 Railroads Standard

©Morningstar 2017. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solelyfor informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not beresponsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order reprints, call+1 312-696-6100. To license the research, call +1 312-696-6869.

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