Union Pacific Corporation (NYSE:UNP) shares are down more than -2.16% this year and recently increased 0.83% or $1.08 to settle at $131.20. Teck Resources Limited (NYSE:TECK), on the other hand, is up 1.99% year to date as of 04/11/2018. It currently trades at $26.69 and has returned 3.21% during the past week.
Union Pacific Corporation (NYSE:UNP) and Teck Resources Limited (NYSE:TECK) are the two most active stocks in the Railroads industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect UNP to grow earnings at a 19.02% annual rate over the next 5 years. Comparatively, TECK is expected to grow at a -12.21% annual rate. All else equal, UNP’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Union Pacific Corporation (UNP) has an EBITDA margin of 49.23%. This suggests that UNP underlying business is more profitable UNP’s ROI is 12.80% while TECK has a ROI of 14.00%. The interpretation is that TECK’s business generates a higher return on investment than UNP’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. UNP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.57. Comparatively, TECK’s free cash flow per share was +0.66. On a percent-of-sales basis, UNP’s free cash flow was 2.09% while TECK converted 4.02% of its revenues into cash flow. This means that, for a given level of sales, TECK is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. UNP has a current ratio of 1.00 compared to 1.80 for TECK. This means that TECK can more easily cover its most immediate liabilities over the next twelve months. UNP’s debt-to-equity ratio is 0.68 versus a D/E of 0.33 for TECK. UNP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
UNP trades at a forward P/E of 15.58, a P/B of 4.13, and a P/S of 4.89, compared to a forward P/E of 8.98, a P/B of 1.01, and a P/S of 1.65 for TECK. UNP is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. UNP is currently priced at a -10.77% to its one-year price target of 147.04. Comparatively, TECK is -16.91% relative to its price target of 32.12. This suggests that TECK is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. UNP has a beta of 0.78 and TECK’s beta is 1.54. UNP’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. UNP has a short ratio of 3.06 compared to a short interest of 2.45 for TECK. This implies that the market is currently less bearish on the outlook for TECK.Summary
Teck Resources Limited (NYSE:TECK) beats Union Pacific Corporation (NYSE:UNP) on a total of 10 of the 14 factors compared between the two stocks. TECK is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, TECK is the cheaper of the two stocks on an earnings, book value and sales basis, TECK is more undervalued relative to its price target. Finally, TECK has better sentiment signals based on short interest.