Is Union Pacific Corporation Managing its Assets Well?

From 2009 to 2014, American railroad major Union Pacific Corp. grew sales and profit at a compound annual rate of 11% and 25%, respectively. These growth rates are impressive for a150-year-old company in a mature industry.

The company owes much of its success to a business model in which it consistently invests in its asset base to grow business, generates higher returns, and reinvests a portion of those returns to grow further. This is a sound strategy, but it can succeed only if returns justify investments. Here's a look at Union Pacific's assets to illustrate how they fit into the company's overall business plan.

Enormous asset baseLike all large railroad companies, Union Pacific locks its capital in net properties, or fixed and long-lived assets.These include land, roads, equipment, and technology, and make up 88% of the company's total assets. Current assets constitute about 9%, mainly cash and receivables. Union Pacific doesn't carry any goodwill or other intangible assets,which makes its balance sheet clear and transparent.

Excerpt from Union Pacific 2014 10-K.

Fixed assets form the backboneIn the last six years, very little has changed in the proportion and composition of the company's fixed assets -- railroads continue to account for more than 60%, while land and equipment together make up another 25%.

Source: Union Pacific 10-K. Chart by author.

Other railroad companies such as CSX Corp., Norfolk Southern, andKansas City Southernhave a similar structure in which fixed assets on average representing 85% of assets. However, Burlington Northern Santa Fe, which is owned by Berkshire Hathaway, is Union Pacific's closest competitor in terms of scale of operations.

Composition of fixed assets of U.S. railroad companies in 2014.Source: Company 10-K. BNSF asset value is given in gross.Chart by author.

The value of Union Pacific'srailroads compares with that of CSX and Norfolk Southern combined. Union Pacific covers more than 32,000 route miles, connecting 23 states. The company also holds much more land than its peers -- more than 1 million acres, an area about the size of Delaware, according to the Union Pacific website. Union Pacific owns more than 8,000 locomotives.

The Union Pacific network in the U.S. Source: Company website.

High asset qualityThis enormous asset base needs matching investments. From 2007 to 2014, Union Pacific invested$26.4 billion in its network and operations. But how productive are the assets?

Let's look at Union Pacific's fixed-asset turnover ratio and compare it with peers'. According to Foolsaurus, "A company's fixed-asset turnover ratio measures the amount of sales the company generates for every dollar of fixed assets it owns." A higher ratio means assets can generate higher sales, which can result in more profit.

The chart below shows that in the last six years, Union Pacific has improved the quality of its assets and is using them to generate increasing amounts of revenue. It spends about $1.7 billion every year on its tracks alone to ensure they remain in good shape.

Of late, Union Pacific's fixed-asset turnover ratio has consistently remained north of 50%. This is among the highest in the industry.

Fixed asset turnover ratio of U.S. railroad companies.Source: Morningstar and BNSF 10K.Chart by author.

Staying flexible with fixed assetsUnion Pacific has a high fixed asset-to-net worth ratio. Foolsaurus defines net worth as the sum of all assets minus the sum of all liabilities.

A high fixed asset-to-net worth ratio indicates the company cannot respond to financial emergencies quickly. It is desirable to have this ratio lower than one. However, Union Pacific's fixed asset-to-net worth ratio is above two, which is comparable to its peers. So investors needn't worry too much as this is typical of all railroad companies given their large proportion of fixed assets.

Fixed asset to net worth ratio of U.S. railroad companies.Source: Morningstar and BNSF 10K.Chart by author.

Union Pacific's current ratio (current assets divided by current liabilities) againmay not appear as attractive if viewed independently. But when compared with industry peers, the company looks well placed. The ratio has improved over the years, and is currently at 1.24, which means Union Pacific can comfortably meet short-term obligations.

Current ratio of U.S. railroad companies. Source: Morningstar and BNSF 10K.Chart by author.

Summing upUnion Pacific has formidable infrastructure. The company invests heavily to ensure its assets remain in good condition. Over the years, the assets have generated more revenue and are most productive when compared with other players in the industry. This bodes well for investors.

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