Executive Summary / Key Takeaways

• Union Pacific is strategically transforming its legacy through operational excellence and a bold $85 billion merger with Norfolk Southern , aiming to create America's first transcontinental railroad by early 2027.
• The company delivered robust Q3 2025 results, with adjusted EPS increasing 12% year-over-year to $3.08 and an adjusted operating ratio improving by 180 basis points to 58.5%, driven by strong core pricing and record operational efficiencies.
• Technological advancements, including NetControl and Precision Train Builder, are foundational to UNP's strategy, yielding best-ever records in workforce productivity, fuel consumption, terminal dwell, and train length.
• Despite macroeconomic softness and international intermodal volatility, UNP reaffirms its three-year EPS CAGR target of high single to low double-digit growth, supported by accretive pricing and a $3.4 billion capital plan for 2025.
• The merger, while paused share repurchases for debt reduction, is expected to unlock approximately $2.75 billion in annualized synergies, enhance competition against trucking and Canadian railroads, and provide significant long-term value for shareholders.

The Unfolding Saga of Union Pacific

Union Pacific Corporation, founded in 1862, has long been an integral part of the United States' economic backbone, operating a vast rail network across 23 western states. This extensive network connects customers and communities to the global economy, serving as a critical artery for freight transportation. The company's overarching strategy centers on safety, service, and operational excellence, a philosophy that has guided its evolution and positioned it for a transformative future. UNP is currently redefining its legacy, moving beyond a history that included the temporary congestion challenges of its 1996 merger with Southern Pacific, towards a future of enhanced efficiency and market leadership. This ambition is powerfully underscored by its bold pursuit of a transcontinental merger and a relentless drive for technological superiority.

Technological Edge: The Engine of Modern Railroading

At the heart of Union Pacific's strategic transformation lies its commitment to technological differentiation and innovation. The company leverages a suite of advanced tools and systems to optimize its operations and enhance service delivery. Key technologies include energy management systems on its locomotive fleet, which contribute to improved fuel consumption, and proprietary tools like Precision Train Builder, designed to optimize train length and mainline capacity. Automation initiatives, such as Mobile NX in terminals, aim to streamline processes and reduce car touch points. Furthermore, the implementation of a new NetControl dispatch system allows for faster operational adjustments and more efficient network management.

These technological investments translate into tangible, quantifiable benefits across the network. In the third quarter of 2025, Union Pacific achieved a best-ever record in fuel consumption rate. Locomotive dwell time reached a record low of 14.9 hours, surpassing the company's goal of reducing it below 15 hours. Train length increased by 2% year-over-year to an all-time quarterly record of 9,801 feet. Terminal dwell time improved by 9% to a record 20.4 hours, while workforce productivity saw a 6% improvement, reaching 1,165 car miles per employee. These metrics demonstrate how technology directly contributes to lower operating costs, improved asset utilization, faster transit times, and enhanced service reliability, thereby strengthening UNP's competitive moat and supporting its pricing power. Beyond current implementations, UNP is actively engaged in R&D, exploring automation in engineering and mechanical tasks, as well as van automation, with a target of achieving a 10% improvement in efficiency.

A Legacy Forged, A Future Defined: Strategic Evolution and Market Dominance

Union Pacific's strategic evolution has been marked by a continuous drive for operational efficiency, particularly since 2019. This focus has been critical in solidifying its market position within the highly concentrated U.S. railroad industry, where it competes directly with other Class I railroads such as CSX Corporation (CSX), Norfolk Southern Corporation (NSC), BNSF Railway (BRK.B) (owned by Berkshire Hathaway), and Canadian National Railway Company (CNI).

UNP's competitive strengths are rooted in its extensive western network, which provides a qualitative advantage in serving Pacific and Gulf Coast ports, and its diversified commodity portfolio spanning Bulk, Industrial, and Premium segments. This scale and diversification enable UNP to offer long-haul efficiency and robust service across a wide range of products, from agricultural goods and chemicals to intermodal containers and automotive parts.

While CSX focuses on eastern density and cost optimization, and NSC excels in eastern corridors and specialized automotive services, UNP's broad geographic reach allows it to capture more cross-country demand. Against BNSF, its primary western rival, UNP offers comparable reliability and capacity, though BNSF may hold a qualitative edge in intermodal speed due to its operational model. UNP's emphasis on diversified freight provides a unique value proposition in agricultural and chemical transport, while its route density for certain commodities is a key differentiator.

Financially, UNP demonstrates robust performance. For the trailing twelve months, Union Pacific's Gross Profit Margin stands at 45.68%, Operating Profit Margin at 40.27%, Net Profit Margin at 28.43%, and EBITDA Margin at 51.81%. These strong margins reflect the company's operational effectiveness and pricing power.

In comparison, while specific margin data for all competitors is not available, UNP's P/E ratio of 18.85 is generally in line with or below some of its peers, such as CSX at 22.82 and NSC at 19.10, suggesting a potentially attractive valuation given its profitability. The company's strategic initiatives, including active management of nearly 400 industrial development projects with a potential revenue of $1.5 billion, and the opening of new intermodal terminals like the Kansas City facility (its fourth since 2021, representing over $1.4 billion in investments), are designed to further leverage its network and service capabilities. UNP's new domestic intermodal service, a collaboration with Norfolk Southern connecting Louisville with key Western and Southern markets, highlights its proactive approach to capturing over-the-road conversions and enhancing market access.

Financial Strength and Operational Prowess

Union Pacific's financial performance in the third quarter of 2025 underscores its operational prowess and strategic execution. The company reported total operating revenues of $6.244 billion, a 3% increase from the prior year, with freight revenues also rising by 3% to $5.927 billion. This growth was driven by strong core pricing gains and a more favorable business mix, despite slightly negative carloads. Operating income for the quarter grew 6% to $2.549 billion, leading to a net income of $1.788 billion, up 7% year-over-year. Diluted earnings per share reached $3.01, an increase of 9.5% from Q3 2024, with adjusted EPS hitting $3.08, a 12% increase when excluding merger-related costs.

The company's operating ratio improved by 1.10 points to 59.20%, and the adjusted operating ratio, excluding merger costs, was an impressive 58.5%, a 180-basis point improvement. This reflects top-line growth, solid operational performance, and significant productivity gains. For the nine months ended September 30, 2025, UNP reported total operating revenues of $18.425 billion and net income of $5.290 billion, representing increases of 2% and 6%, respectively, over the same period in 2024. Cash provided by operating activities for the nine-month period increased 6% to $7.065 billion. The company's adjusted debt-to-EBITDA ratio stood at 2.6x at the end of Q3 2025, demonstrating a healthy balance sheet.

Operational metrics further highlight UNP's efficiency. In Q3 2025, freight car velocity improved 8% to 226 daily miles per car, and average train speed increased 4% to 24.2 miles per hour. Workforce productivity improved 6%, and locomotive productivity rose 4%. These achievements are a direct result of UNP's continuous focus on operational excellence and technological integration, enabling the company to handle volume fluctuations efficiently while maintaining high service levels.

The Transcontinental Vision: Norfolk Southern Merger

A pivotal development for Union Pacific is its pending $85 billion stock-and-cash merger with Norfolk Southern Corporation, announced on July 28, 2025. This landmark agreement aims to create "America's first transcontinental railroad," spanning over 50,000 route miles across 43 states and connecting approximately 100 ports. The strategic rationale is compelling: to transform the U.S. supply chain, unleash industrial strength, improve worker safety, and significantly reduce transit times by eliminating interchange delays. Management anticipates that the merged entity could move merchandise traffic 15% to 20% quicker.

The transaction involves the issuance of approximately 224.80 million shares of Union Pacific common stock and $20 billion in cash, with the cash portion funded through new debt and accumulated operating cash. The merger is currently expected to close in early 2027, pending regulatory and shareholder approvals. In a significant move to secure labor support, Union Pacific has guaranteed jobs for every unionized employee of both companies on the day the merger closes, an agreement formalized with SMART-TD, the nation's largest railroad union. Over 400 customers have already expressed support for the proposed combination, recognizing its potential benefits. To prioritize debt reduction in anticipation of the merger, Union Pacific has temporarily paused its share repurchase program, having paid down $1 billion in long-term notes during Q3 2025. The company intends to file its merger application with the Surface Transportation Board by the end of November or early December 2025.

Outlook and Risks: Charting the Course Ahead

Union Pacific's outlook for 2025 remains consistent with its three-year Investor Day targets, reaffirming expectations for high single to low double-digit EPS CAGR, accretive pricing, an industry-leading operating ratio, and a strong return on invested capital. The company plans a capital expenditure of approximately $3.4 billion for 2025, consistent with 2024 levels, focusing on infrastructure, asset renewal, and growth-oriented projects. The recent enactment of H.R.1, which makes 100% bonus depreciation and full expensing of internally developed software permanent, is expected to provide an additional $250 million to $300 million in annual cash flow benefits. While share repurchases are paused for the merger, UNP remains committed to an industry-leading dividend payout ratio of around 45% of earnings, with repurchases expected to resume in 2028.

Despite this positive outlook, Union Pacific acknowledges a mixed macroeconomic environment. Fourth-quarter 2025 volumes are projected to be down 6%, primarily due to challenging year-over-year comparisons in international intermodal. Softer automotive sales and housing starts also present headwinds. The pricing environment, particularly in the truck-competitive intermodal market, remains challenging. Regulatory scrutiny and potential opposition to the Norfolk Southern merger, including concerns from chemical shippers and other railroads, represent a significant risk. Legal and environmental liabilities, with potential personal injury claims ranging from $389 million to $508 million, also bear watching. Trade policy volatility and outstanding regulatory waivers for technology implementation add layers of uncertainty. However, management emphasizes its agility and focus on "controllables," aiming to outperform markets and leverage its operational strengths to mitigate these challenges.

Conclusion

Union Pacific Corporation stands at a pivotal juncture, leveraging a rich history of railroading with a forward-looking strategy centered on operational excellence and technological leadership. The company's robust financial performance in Q3 2025, marked by strong earnings growth, improved operating ratios, and record operational efficiencies, reflects the successful execution of its strategy. This solid foundation, built on continuous productivity gains and accretive pricing, positions UNP to pursue its ambitious vision of creating America's first transcontinental railroad through the merger with Norfolk Southern.

The proposed merger is a transformative move, promising substantial synergies, enhanced competitive positioning against both domestic and international rivals, and a more efficient U.S. supply chain. While macroeconomic uncertainties and regulatory hurdles present challenges, Union Pacific's commitment to its long-term financial targets, strategic capital investments, and a disciplined approach to shareholder returns underscores its resilience. By focusing on its core strengths and embracing innovation, Union Pacific is not merely adapting to change but actively shaping the future of freight transportation, poised for sustained value creation for its discerning investment audience.