Is Union Pacific Overvalued Amid Rising Short Interest and Steady Earnings Growth?

The question of whether Union Pacific (UNP) is overvalued hinges on a delicate balance between its robust earnings growth, rising short interest, and the transformative potential of its proposed merger with Norfolk Southern. As of Q3 2025, the stock's valuation metrics suggest a premium relative to earnings and growth expectations, while market sentiment remains mixed due to short-term bearish positioning. This analysis evaluates the interplay of these factors to determine if the stock's current price reflects its long-term potential.

Market Sentiment: Short Interest Trends and Investor Behavior

Union Pacific's short interest percentage stood at 3.52% in Q3 2025, representing 20.81 million shares sold short. While this figure is below the 10% threshold typically associated with strong bearish sentiment, the short interest ratio (SIR) of 7.82 indicates a high level of pessimism. A SIR above 5 often signals that short sellers would take several days to cover their positions, potentially amplifying volatility if a short squeeze occurs.

The trend in short interest has been volatile. After a dramatic 99.3% decline in June 2025 short interest surged, surging to 19.91 million shares by November 2025, reflecting renewed skepticism. This shift coincided with the announcement of the proposed merger with Norfolk Southern, which, while promising long-term synergies, introduced regulatory and operational uncertainties. Short sellers may be hedging against potential disruptions during the merger approval process, which is expected to take until 2027.

Valuation Metrics: Premium Pricing Amid High Leverage

Union Pacific's valuation metrics paint a mixed picture. The stock trades at a P/E ratio of 18.69 and a PEG ratio of 2.67, suggesting it is priced for growth but at a premium to its fundamentals. The PEG ratio, calculated using a 5-year EBITDA growth rate of 6.50%, implies that the market is discounting slower growth than the company's long-term guidance of high single-digit to low double-digit earnings growth according to the company's guidance. This discrepancy could indicate overvaluation if the company fails to meet elevated expectations.

However, earnings growth has been strong. Q3 2025 adjusted EPS rose 12% year-over-year to $3.08, driven by core pricing gains and an improved operating ratio of 58.5%. The company's debt-to-equity ratio of 1.90 while significantly higher than the industry median of 0.52, reflects its capital-intensive nature and strategic investments in infrastructure. Critics argue this leverage could constrain flexibility during economic downturns, but proponents note that the merger with Norfolk Southern is expected to generate 11% growth by the third year, potentially justifying the debt.

Long-Term Viability: Merger Synergies and Industry Dynamics

The proposed $85 billion merger with Norfolk Southern is the most critical factor in assessing Union Pacific's long-term value. If approved, the combined entity would create a transcontinental railroad spanning 50,000 miles, reducing interchange delays and enhancing supply chain efficiency. Proponents highlight projected benefits such as shifting 2 million truckloads to rail annually and creating 900 new union jobs. These synergies could drive operational efficiencies and revenue growth, offsetting current valuation concerns.

Regulatory hurdles remain, however. The Surface Transportation Board (STB) must determine that the merger "enhances competition and serves the public interest" under 2001 merger rules. Critics, including BNSF Railway and Canadian Pacific Kansas City, argue the merger could reduce competition and lead to monopolistic practices as per regulatory analysis. Delays or rejections could force Union Pacific to revise its strategy, introducing short-term volatility.

Conclusion: Balancing Risks and Rewards

Union Pacific's valuation appears stretched relative to its current earnings and growth rates, as evidenced by its elevated P/E and PEG ratios. However, the company's strong Q3 performance and the potential upside from the Norfolk Southern merger justify a cautious bullish stance. The rising short interest reflects near-term uncertainty but may not persist if the merger progresses smoothly and earnings growth accelerates. Investors should monitor regulatory developments and the company's ability to execute its strategic vision. For now, the stock's valuation seems to reflect a balance between its growth potential and the risks inherent in its high leverage and merger-related uncertainties.