Union Pacific Corporation (NYSE:UNP) and Norfolk Southern Corporation (NYSE:NSC) are the two most active stocks in the Railroads industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

**Growth**

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect UNP to grow earnings at a 12.95% annual rate over the next 5 years. Comparatively, NSC is expected to grow at a 12.20% annual rate. All else equal, UNP’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Union Pacific Corporation (UNP) has an EBITDA margin of 38.55%, compared to an EBITDA margin of 45.79% for Norfolk Southern Corporation (NSC). This suggests that NSC underlying business is more profitable. UNP’s ROI is 13.60% while NSC has a ROI of 9.50%. The interpretation is that UNP’s business generates a higher return on investment than NSC’s.

**Cash Flow **

If there’s one thing investors care more about than earnings, it’s cash flow. UNP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.38. Comparatively, NSC’s free cash flow per share was +0.37. On a percent-of-sales basis, UNP’s free cash flow was 1.53% while NSC converted 1.08% of its revenues into cash flow. This means that, for a given level of sales, UNP 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 1.10 compared to 0.80 for NSC. This means that UNP can more easily cover its most immediate liabilities over the next twelve months. UNP’s debt-to-equity ratio is 0.80 versus a D/E of 0.78 for NSC. UNP is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

UNP trades at a forward P/E of 17.65, a P/B of 4.67, and a P/S of 4.40, compared to a forward P/E of 18.67, a P/B of 2.99, and a P/S of 3.71 for NSC. UNP is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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**

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. UNP is currently priced at a -4.43% to its one-year price target of $119.30. Comparatively, NSC is 5.08% relative to its price target of $124.78. This suggests that UNP is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for UNP and 2.60 for NSC, which implies that analysts are more bullish on the outlook for NSC.

**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 0.83 and NSC’s beta is 1.36. 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 2.97 compared to a short interest of 2.71 for NSC. This implies that the market is currently less bearish on the outlook for NSC.

**Summary**

Union Pacific Corporation (NYSE:UNP) beats Norfolk Southern Corporation (NYSE:NSC) on a total of 9 of the 14 factors compared between the two stocks. UNP is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. UNP is more undervalued relative to its price target. Finally, CSX has better sentiment signals based on short interest.