Is Union Pacific Set for a Revaluation After $85B Norfolk Southern Merger Announcement?

Thinking about Union Pacific (UNP) and not quite sure whether you should hold, buy more, or take profits? You are not alone. Over the past few months, Union Pacific has had investors buzzing, especially following headlines that feel straight out of a finance thriller. First came the announced $85 billion acquisition of Norfolk Southern, something that could transform the freight railroad landscape. Not surprisingly, the news sent ripples through the industry and led many to reconsider what a transcontinental rail operator might be worth. Berkshire Hathaway is even rumored to be interested in CSX after this shake-up, so it is not just you questioning where this is headed.

The market’s reaction has been a mix of excitement and uncertainty. The stock jumped nearly 3% over the past week after the merger was announced, reversing a recent slide and suggesting renewed growth optimism. However, these gains come after a long stretch of underperformance, with total returns over the past year at about -5.6%. Even so, longer-term investors know the five-year total return is an impressive 29.6%, highlighting the kind of resilience that keeps UNP at the top of many watchlists.

So, is Union Pacific undervalued? According to our valuation scorecard, UNP meets the criteria on 2 out of 6 standard measures of undervaluation. This indicates there is potential here, but also reasons to look more closely.

In this article, we will break down how each valuation approach assesses Union Pacific before examining a more comprehensive way to decide whether the stock belongs in your portfolio.

Union Pacific delivered -5.6% returns over the last year. See how this stacks up to the rest of the Transportation industry.

Approach 1: Union Pacific Cash Flows

The Discounted Cash Flow (DCF) model helps estimate a company's value by projecting its future cash flows and then discounting them to the present using an appropriate rate. This approach gives investors a clearer picture of what those future cash streams are really worth today.

For Union Pacific, current Free Cash Flow stands at $6.24 billion, with forecasts pointing to healthy growth over the coming decade. Analysts expect annual FCF to climb to around $12 billion by 2035, based on regularly increasing projections and a robust long-term outlook for the business. These figures reflect confidence that UNP will continue generating significant cash in the years ahead.

Using a two-stage Free Cash Flow to Equity model, the DCF estimates Union Pacific’s intrinsic value at $274.29 per share. Given where shares are trading right now, this represents a 16.9% undervaluation, indicating the stock is trading below what the model calculates as its fair value.

If you are looking for a reason to act, the discounted cash flow analysis is sending a clear value signal here.

Result: UNDERVALUED

Our DCF analysis suggests Union Pacific is undervalued by 16.9%. Track this in your watchlist or portfolio, or discover more undervalued stocks based on DCF analysis.

Approach 2: Union Pacific Price vs Earnings

When evaluating a profitable company like Union Pacific, the Price-to-Earnings (PE) ratio is often the go-to metric. This measure helps investors compare the value of a company’s stock relative to its actual earnings, providing a quick sense check on price tags versus profits.

Typically, a “normal” or fair PE ratio can vary depending on how the market sees future growth, risk, and stability. Companies with higher expected earnings growth or less risk usually command higher PE ratios. Conversely, those with slower growth or more uncertainty might trade at lower multiples.

Currently, Union Pacific’s PE ratio stands at 19.48x. Compared to the transportation industry average of 28.02x and a peer group average of 17.25x, UNP’s multiple is somewhat moderate: higher than immediate peers but below the broader industry. Simply Wall St’s proprietary Fair Ratio for Union Pacific is 19.37x. This benchmark considers the company’s profitability, the sector’s trends, and Union Pacific’s unique risk profile.

Since Union Pacific’s actual PE ratio is nearly identical to its Fair Ratio, there is little evidence of over- or undervaluation based on this metric at current price levels.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Union Pacific Narrative

Instead of only relying on numbers, Narratives let you connect Union Pacific’s story to a financial forecast and fair value, helping you see the business as more than just a sum of its parts.

A Narrative is your perspective on where the company is headed, built on your assumptions about its future revenue, earnings, and margins, and expressed simply on the Simply Wall St platform alongside millions of other investors’ views. This method gives you an accessible and dynamic way to make investment decisions by linking your personal view of Union Pacific’s future to an up-to-date fair value and comparing it to the current share price.

Narratives empower investors to act with confidence, allowing you to choose to buy, hold, or sell based not only on static ratios but also on your own understanding of the company as reflected in current forecasts, which update automatically as the latest news or earnings are released.

For example, some investors, assuming efficiency upgrades succeed and new facilities drive growth, might see a fair value as high as $286 per share. Others, who are concerned about trade risks or softer demand, may estimate it at $213 per share.

Do you think there's more to the story for Union Pacific? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com