Why Union Pacific Is Outperforming

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The rail transport industry has been one of the best performing sectors over the past several years. The shares of every major rail transport company are trading at several multiples of their prices in the early 2000s.

There are two reasons for this. The first is that rail transport companies operate as a de facto oligopoly. There are only a handful of them throughout North America, and with a couple of exceptions, in any given region there are only two or three competitors. This gives rail transport companies pricing power.

The second is that rail transport is more efficient than trucking. Rail transport uses less fuel and a train employs one person to do the the work that hundreds of truckers would need to do. While this doesn’t make trucks obsolete, it makes rail transport the preferable mode of shipment for industrial and consumer goods.  Furthermore, the advantage that rail transport has over truck transport has been growing.  Not only are trains more fuel efficient than trucks, but fuel has become more expensive, thus widening the gap.  Employing somebody is more expensive as well thanks to a more complicated regulatory environment.

Despite these longer-term positive trends the last couple of years have been tough for rail transport companies. This is the case because one of the primary goods shipped by each of these companies is coal, and coal prices are down, as is demand, as a result of stricter regulations on coal-based electricity.  While this hit some companies more so than others, every major railroad company was impacted.

However, one company that has continued to grow its sales and profits at an admirable pace is Union Pacific (NYSE:UNP). Union Pacific is the largest publicly traded rail transport company. It is also the only publicly traded rail transport company that predominantly operates in the western United States and in Canada, as Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A) bought the company’s major competitor — Burlington Northern Santa Fe.

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