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Morgan Stanley's 8 Best Stock Ideas for 2011

Stocks in this article: RSGFSLB

5. Union Pacific (UNP) provides rail transportation.

Fundamentals: Union Pacific's 12-month sales have risen 11%. Third-quarter net income rose 51% to $778 million and earnings per share stretched 54% to $1.56. Revenue ascended 20%. The operating margin rose from 26% to 32%. The company held $1.4 billion of cash and $9.7 billion of debt at quarter's end, equal to a 0.8 quick ratio and a 0.6 debt-to-equity ratio.

Valuation: Union Pacific's stock sells for a forward earnings multiple of 15, a 23% discount to the road and rail industry average. It's fairly valued based on trailing earnings, book value and cash flow per share. But, the stock's PEG ratio of 0.4 signals a 60% discount to estimated long-run fair value. In Morgan Stanley's bull-case scenario, Union Pacific's stock will advance 28% to $121. In the bank's bear-case scenario, the stock will decrease 10% to $85.

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