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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Union Pacific

November 20th 2011 Union Pacific
NYSE Symbol: UNP
Industry: Railroad
Price as of 11/18: $102.35

So much for our rally. As the European crisis spreads from Greece, Italy, and now Spain, the major averages succumb to more profit-taking. In the US, on the other hand, the economic data is slowly improving, however investors remain cautious. The defensive sectors like utilities, healthcare, and consumer staples continue to hold up. Dividend stocks are also performing well. The technology sector was performing great until this past week as a number of the blue chips including Apple sold off. Last week we highlighted Merck, a defensive drug stock that hiked their dividend an impressive 10%. This week we'll feature a transportation company that hiked their dividend 26% on Thursday. The stock of the week is the largest railroad company in the U.S., Union Pacific. Thanks to sky high oil prices, railroads are back from the brink as more and more companies use them to transport their goods to the coast, particularly the West coast. The European debt crisis hasn't slowed down Union Pacific as the company continues to churn out record cash flow allowing them to hike their dividend. Any investor looking for exposure to the transportation space should take a look at Union Pacific.

Back in October, Union Pacific reported record profits. Third-quarter earnings rose 16%, thanks to higher prices that offset slower growth in shipments and higher fuel costs. The Omaha, Nebraska firm earned $904 million, or $1.85 per share in the third quarter. That's up from $778 million, or $1.56 per share, a year ago. Revenue rose 16 percent to $5.1 billion. Taking a closer look at the quarter, the company generated higher business volumes across four of the firm's six business groups: automotive (up 10%), industrial products (up 8%), energy (up 7%) and chemical shipments (up 5%). Agricultural and intermodal volumes fell, the latter due to a lost customer. Freight revenues advanced across all six segments driven by fuel-cost recoveries. Industrial products were up a whopping 24%, while automotive was up 23%, supporting the view that the U.S. economy remains vibrant. In fact, the nation's largest railroad also said it expects its business to continue to grow despite an uncertain view for the broader U.S. economy. The fact that the company was willing to hike their dividend for a second time this year is a great demonstration of the company's financial strength.

Union Pacific's stock has performed well since the August and September correction, recovering most of what it lost. Currently the stock trades for 14 times earnings, 13 times next year's earnings, and 2.5 times sales. The company also trades for 2.6 times book value of $38 a share. And thanks to the dividend hikes, the yield is now above 2%. With the purchase of Burlington Northern Santa Fe by Warren Buffett a couple years ago, that leaves only a few blue chip railroad stocks left for investors to get into. Union Pacific's strong fundamentals and dividend make it a good long term buy in the transportation sector.