Thursday, November 6, 2014

The Union Pacific Rolls and Rocks

Union Pacific Locomotive
I grew up in a small town in Missouri in a house that was about 100 feet from one of the main tracks of the Missouri Pacific Railroad. I remember the wail of the horn, the roar of the diesel engines and the shaking of the ground when the trains rolled by several times per day. The trains were as friendly as they were powerful and always began with a wave from the engineer in the cab of the locomotive and ended with a wave from the conductor in the caboose.

Originally the Pacific Railroad, ground breaking for the Missouri Pacific took place in St. Louis on July 4th, 1851, making it the first railroad west of the Mississippi River. The line merged with the Union Pacific in 1982 and over the next decade, the familiar blue locomotives were repainted in bright yellow and red.

Although I seldom have the opportunity to count the cars on passing trains anymore, I remain a big fan of the Union Pacific Railroad. It is the second largest holding in my portfolio and one of my favorite companies. Here are a few of the reasons why:

1.  The Union Pacific is a strong, financially stable company with an extremely dedicated and competent management team. The strength of the leadership is apparent in their earnings announcements through the results they present and the way they present those results.

2. As long as the world needs to eat, build houses, drive cars or drill for oil, there will be strong demand for rail services which will allow the company to grow and price its service at a level that will allow for future investment.

3.  The company is protected by a strong moat. The capital investment required to build the rails, purchase the locomotives and rolling stock, staff the trains and yards, and manage the logistics are a barrier against excessive competition.

4.  The operating premise of a railroad is easy to understand and transparent. It is a business that Warren Buffet would love and does since his company owns the Burlington Northern Santa Fe.

5. Reviewing the quarterly financial statements of the Union Pacific provides a wonderful overview of the health of the country's economy as a whole and can reveal trends and opportunities before they are apparent in the mainstream news.

6.  The inertia and stability of a slowly growing company like the Union Pacific helps dampen the gyrations of a portfolio highly weighted in 3D printing companies.

Did you ever count the cars on the trains as they passed?

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The Thrill of Ownership
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