Union Pacific: Quality franchise with strong entry barriers and duopoly economics finds the best operator
More than a year back in March 2019 we had taken an exposure in Union Pacific (UNP) triggered by the appointment of Jim Vena, protégé of Hunter Harrison, as the COO of the company. Even though the company joined the Precision Scheduled Railroading (PSR) bandwagon much earlier in September 2018, the announcement did not instill confidence to pull the trigger then. The initial investment started with a tumultuous journey as the freight volumes went from a mild recession in late 2019 to one of the worst (in 100+ years of history of freight) in March 2020. While jittery and shaken by the magnitude of destruction, a $ 2.1 m open market purchase by William Laney, former CEO of Sysco and director of UNP could not go unnoticed, as this was the largest purchase by an insider after 2015. After all, at the March-end price the Street was factoring a mere inflation-like growth of 3.5% (vs. 11% last 10 years) to an already depressed 2019 free cash flow implying no benefits of PSR.