<div id="readability-page-1"><div><div>ThesisUnion Pacific Railroad (UP) is a network monopoly in the western U.S., and its economics are more dependent on how fast UP's assets turn than on macroeconomic fortune. To make this investment opportunity testable, I'm focusing on one number: freight-car velocity, i.e. how many miles per car per day the railroad's fleet is moving. Increased velocity decreases cycle time, increases the number of loads each car and locomotive can haul, reduces both labor and fuel costs per gross-ton-mile, and provides the justification to set prices. All of these physical advantages appear as mechanical advantages in the form of a lower operating ratio, increased EBIT (earnings before interest &amp; taxes), and more consistent free cash flow. The moat (i.e., rights-of-way that cannot be duplicated, franchise tenure, and network density) creates the possibility; velocity translates that possibility into dollars. Thus, the thesis is testable and verifiable. Therefore, if Union Pacific Railroad maintains freight-car velocity in the range of the mid-200s miles per car per day and pushes velocity toward the low-to-mid-230s, the railroad should generate increasing earnings during normal demand periods due to the fact that a faster railroad is a less expensive railroad and a more desirable service provider.<figure></figure>The UNP network has increased efficiency for nearly twenty years: the operating ratio is down several points since the mid-2010's and is significantly less than the mid-2000's; car-velocity is currently in the upper mid-230s miles/car/day on recent readings; and the cash impact is evident ~ $6 billion FCF in 2024 with per-share dividends approximately 4 5 times higher than 2005. This competitive advantage is structural, the velocity is measurable and the cash is quantifiable.Key Performance Indicator.<figure></figure>The singular key performance indicator (KPI) is freight-car velocity, defined as miles per car per day. Freight-car velocity is the one observable number that encapsulates service quality, asset utilization and network fluidity that can be checked each quarter. Miles per car per day that are higher indicate that cars spend less time idle in yards, waiting for crews or power, or queuing for a ramp slot; a faster load-empty-load cycle generates more revenue days per month using the same amount of equipment. Locomotives that operate at a higher percentage of time hauling (and therefore less time idle) consume less fuel and need fewer recrews. Therefore, velocity results in decreased unit costs and enables increased pricing due to customer preferences for reliability. For purposes of this thesis, treat the mid-200s miles per car per day as a baseline level of service and the low-to-mid-230s as the next performance band that a railroad could consistently achieve through disciplined operational practices. This thesis succeeds or fails based upon whether the KPI prints within this band during peaks, weather-related volatility and interchange noise; and fails if the KPI declines and remains below this band.Operating Facts.Union Pacific Railroad management has emphasized the &#34;blocking and tackling&#34; necessary to support increased velocity: higher trip-plan compliance, shorter terminal dwell, increased locomotive productivity, and tighter interchange windows. Reliability has been the focus of Union Pacific Railroad capital spending rather than flashy expansion siding extensions, added crossovers, point-specific double-tracking, distributed power, energy management systems, and digital dispatch upgrades. Intermodal service has stabilized as box turns and on-time originations have improved and premium merchandise lanes have maintained price above rail inflation in corridors where consistency has returned. Commercial teams have utilized these successes to negotiate contracts on better terms and to capture long-haul freight from highway carriers, particularly on West-to-East lanes and at the Mexico gateway. Each of the North American Class I railroads have raised car-velocity and reduced their operating ratio since the mid-2000s. BNSF's adjusted operating ratio is in the mid-60s in 2024 (and will continue to decline into 2025); while Canadian National (CN) is in the low 60s (the benchmark). CSX and CPKC are in the low-to-mid 60s on recent readings. The one characteristic among these railroads is PSR-style discipline: longer trains, improved dwell and more turns per asset. North American railroads have experienced roughly 15 20 percent increases in velocity and 5 point decreases in operating ratios for the last ten years, doubling sector-wide profitability even though real freight yields have been stable since 2005.Bridge between Velocity and P&amp;L.<figure></figure>To convert the KPI into dollars requires some approximate assumptions. Start with a large-cap railroad base case: $25B in revenue, an operating ratio of approximately 60%, and base EBIT of approximately $10B. Assume a sustained, system-wide increase in freight-car velocity that equates to an average increase in train speed of 3 mph, which is equivalent to an increase in freight-car velocity of a few dozen miles per car per day. There are four primary areas in which the operating ratio and EBIT improve as a result of the sustained velocity increase. The first area is the reduction in crew starts, recrews and terminal hours, resulting in a decrease in the operating ratio, thereby generating an increase in EBIT of approximately $300M based upon an operating ratio improvement of 120 bps on $25B in revenue. The second area is the reduction in fuel consumption as a result of the increased train speeds, which results in an increase in fuel efficiency; assuming total fuel expenditure of approximately $3B, a 1.5% to 2% increase in fuel efficiency would result in an increase in EBIT of approximately $45M to $60M. The third area is the increase in reliability that enables price and mix increases. Assuming an increase in yield of 1% on $25B in revenue, would result in an increase in revenue of approximately $250M; with an incremental margin of approximately 50%, this would generate an increase in EBIT of approximately $125M. The fourth area is the increased capacity generated by the increased velocity, which enables Union Pacific Railroad to move an additional 2% of volume; this would generate an increase in revenue of approximately $500M; with an incremental margin of approximately 40%, this would generate an increase in EBIT of approximately $200M. Combining all of the estimated increases in EBIT, a sustained increase in freight-car velocity could potentially generate an additional $600M to $700M of annual EBIT prior to considering second-order effects such as lower car hire expense, fewer leased locomotives and lower overtime. The math is simplified to enable any investor to update the estimates on a quarterly basis: check the KPI, use the same conversion factors, and determine if the bridge is tracking.At the same time, real freight yields have remained relatively stable (low single digit percentage increase) since 2005 while the unit cost per ton-mile has decreased due to increased velocity, dwell, train length and labor productivity. Therefore, the structural cost differential between rail and highway freight is greater today than fifteen to twenty years ago latent pricing power that will &#34;turn-on&#34; as service reliability remains consistently high.Peer and Historical Comparison.<figure></figure>CSX Transportation (CSX) and Norfolk Southern Railway (NS) provide a good benchmark. Over extended periods of time, every sustained improvement in their operating ratios was accompanied by improvements in average train speed and reductions in terminal dwell; conversely, each period of congestion resulted in marginal erosion of margins and market share to highway carriers. Union Pacific Railroad's network configuration provides unique leverage to service improvements since its Western routes are long, and thus benefit more directly from every additional mile per hour, and because the Mexico Gateway represents a structural source of growth in automobiles and manufactured products. History repeats itself: when Union Pacific Railroad has successfully maintained high levels of freight-car velocity over consecutive quarters, premium intermodal has regained share, merchandise pricing has outpaced rail inflation in corridors where service has been restored, and the operating ratio has established a new floor. Conversely, when velocity declined, car-cycle turns lengthened, fuel consumption per gross ton mile increased, and price leadership was lost. The current plan seeks to maintain the former condition and avoid the latter.Union Pacific is the most consistent among its US-based peers to apply Canadian-style precision scheduled discipline across a large and complex western railroad network. The velocity trend now closely mirrors what CN achieved a decade prior sustained mid-230s mi/car/day on recent readings indicating additional opportunities for margin and cash flow growth. If the network averages the low 230s in terms of velocity and continues to push on train length and dwell, UNP can move toward a CN-like OR over this decade with the cash compounding already evident in ~ $6 billion of 2024 FCF.Why Not Canadian NationalCanadian National (CNI) is still the operational benchmark consistently low 60s OR with tight dwell and speed so nothing is &#34;wrong&#34; with owning CNI; I simply favor Union Pacific because of the spread of potential improvement. UNP's recent velocity in the mid-230 mi/car/day range is comparable to where CN was a decade prior, providing UNP with additional self-help runway: improving dwell, increasing train length and cycling crews/power faster to push OR toward CN-like levels. UNP's western franchise West Coast gateways into the Midwest with Mexico connectivity also provides mix and volume optionality (intermodal and near-shoring lanes) that should capitalize on the widening cost differential between truck and rail once service reliability is consistently high. Importantly, the cash engine is already evident (~ $6 billion FCF in 2024 and a multi-decade dividend ramp), thus investors receive both current return and operational upside. If valuation flips and CN is trading at a clear through-cycle discount, CNI becomes the quality-at-a price choice; at similar multiples I prefer the improver over the already optimized (CNI).Sources of Evidence and Lines of Reasoning.The planned operating program clearly maps to the KPI. Improved trip-plan compliance increases predictability along the entire route, thereby decreasing the likelihood that yards will experience peak volumes and reduce idle hours. Discipline in yard operations, including earlier block swaps, better ramp slotting, and tighter interchange windows, all contribute to a reduction in terminal dwell. More efficient crew scheduling also contributes to a reduction in recrews by synchronizing starts with corridor throughput and smoothing lineups. Improvements in locomotive productivity compound the effects: distributed power enables longer trains to accelerate and decelerate more efficiently; energy-management systems enable the locomotive to optimize throttle profiles to minimize fuel usage without sacrificing schedule. If these programs are successful, then miles per car per day will not simply increase; they will remain at the new level during holidays and weather events, and the KPI will demonstrate a correlation to decreasing fuel consumption per gross ton mile and to improved customer on-time performance.Labor is the first constraint on achievable velocity since crew shortages limit the maximum rate of travel; the mitigating factor is steady hiring, faster training, and tools that alert operators to lineup drifts early. Weather events and accidents are the classic exogenous shocks; floods, fires, and significant derailments cause slow orders and create out-of-service power, increasing terminal dwell until the railroad can recover. Competition from highway carriers is the primary commercial threat: if truck capacity tightens at the exact time rail service falters, price differentials on long-haul traffic diminish. Regulatory oversight is a constant, background threat; however, the best way to protect against regulatory actions is to demonstrate high-quality service to customers through the KPI. Each of these threats may affect the slope and timing of the KPI's growth, and thus the magnitude and timing of the earnings bridge.The Norfolk Southern AcquisitionUnion Pacific's announced $85 billion acquisition of Norfolk Southern pending STB approval with an expected close by early 2027 is too material to ignore in the context of this velocity-driven thesis. On balance, the deal presents a mixed picture for the KPI framework. On the positive side, the combination eliminates interchange friction between West and East, theoretically allowing coast-to-coast cars to move without handoff delays; single-line scheduling across 50,000+ route miles could improve system velocity once integration is complete, and management has projected $2.75 billion in annual synergies, a portion of which should flow from network fluidity gains. However, history teaches caution: rail mergers typically depress velocity for 1224 months during integration as operating cultures clash, dispatch systems consolidate, and crew pools reorganize the UP-SP merger of 1996 caused years of congestion before gains materialized. The added leverage (roughly $20 billion of incremental debt to fund the cash component) also narrows the margin of safety if velocity stalls and the EBIT bridge takes longer to build. Compared to CPKC, which integrated Kansas City Southern into a single-line NAFTA network, UNP-NS would be a far larger and more complex undertaking involving two mature legacy systems rather than one acquirer absorbing a smaller franchise. Investors should monitor quarterly velocity readings closely through the regulatory period and the first two years post-close; if the KPI holds in the mid-230s through integration, the deal likely amplifies the thesis, but if velocity regresses into the mid-200s or below for an extended period, the self-help runway becomes operational drag rather than opportunity.Guru HoldingsThe largest of the three entities (shown below) for Ken Fisher (Trades, Portfolio)'s Fisher Asset Management is Fisher Asset Management itself. The dashboard indicates a Union Pacific investment worth approximately $1.41 B (with about 6.4 M shares), which represents roughly ~0.49 % of Fisher's reported equity portfolio; the average purchase price was about $182. The trading history shows consistent purchasing over the last five years, with recent increases (in the second quarter of 2025, Fisher added a little over 0.7 % to the position, increasing holdings by about +46.4 k shares); the stock had been averaging near $222 during a $208$238 trading range.The other entity, Ken Griffin's Citadel Advisors, is a large trader of UNP shares. Citadel Advisors' reported UNP position is about $371 M (representing about 1.68 M shares), and accounts for approximately ~0.31 % of their disclosed equity portfolio; the average purchase price was about $159. The time line indicates regular buying and selling of hundreds of thousands of shares; there was a large increase in the position in the second quarter of 2025, approximately +2,313 % (a total of +1.61 M shares), which may indicate Citadel Advisors is using this stock in a tactical manner.PRIMECAP Management (Trades, Portfolio) is the third entity listed. PRIMECAP Management (Trades, Portfolio) owns about $242 M of Union Pacific stock, equivalent to approximately 1.1 M shares, and represents approximately ~0.16 % of their disclosed equity portfolio. The average purchase price was about $95.1. PRIMECAP Management (Trades, Portfolio) has sold portions of the position since 2022; the second quarter of 2025 saw the largest reduction of the period, with sales of approximately ~25.8 % of the position, and ~383 k fewer shares were held than prior to that time.ValuationUnion Pacific is normally priced at modest multiples of the broader market and nearly all of its peers due to its &#34;wide moat&#34; and ability to convert cash into earnings consistently. It would take a large multiple expansion for this stock to generate heroic returns. Assuming the company maintains about $10 billion in base EBIT, and about 700 million in additional EBIT (incremental) at steady-state from the velocity bridge, maintaining the multiple constant will produce mid single digit rate intrinsic value accretion. If investors believe the company can maintain an operating ratio in the high fifties at normal volumes, a slight multiple increase on EBIT could occur and add several points of potential upside above the fundamental improvement in earnings. With the free cash flow available to support maintenance capex, reliability capex, dividends, and opportunistic buyback, the company can preserve the flexibility of its balance sheet.ConclusionUnion Pacific's wide moat stems from its replaceable rail network. To add value, however, the rail network must be operational. The best and most predictable indicator of how well the railroad is meeting customer expectations, freight car velocity is the best indicator of how well the railroad is performing. A railroad that moves freight cars faster is cheaper as each freight car and locomotive does more work per day and is more valuable as a reliable source of freight pricing and service to win back freight lost to trucking. The thesis is simple: keep the miles per freight car per day within a reasonable band and continue to improve toward the low to mid two thirties, and the income statement should deliver an improved operating ratio, higher EBIT, and stronger free cash flows based upon current fundamentals. There is no need to assume heroic macro conditions for the income statement to produce these results. </div></div></div>

The article discusses Union Pacific Railroad's focus on freight-car velocity as a key performance indicator. By increasing velocity, the railroad reduces costs and improves service, leading to a lower operating ratio and higher earnings. The thesis suggests that maintaining velocity in the mid-200s miles per car per day will enhance profitability. Union Pacific's strategic focus on reliability and operational efficiency has led to significant financial gains, with a projected $6 billion free cash flow in 2024.

Union Pacific: The Velocity Thesis