What Is Norfolk Southern’s Fair Stock Price Estimate Based On Expected 2020 Earnings?

by Trefis Team
Norfolk Southern
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We estimate that Norfolk Southern’s (NYSE:NSC) fair price based on expected 2020 earnings is $199, which is slightly above the current price of $190. Norfolk Southern’s stock price has grown over 25% year-to-date, primarily driven by the company’s focus on reducing its expenses. This has boosted the company’s bottom line despite 2019 being a tough year for top line growth, amid export woes and increased trucking capacity.

Norfolk Southern is engaged primarily in freight transportation in the eastern U.S. Its customers include chemical producers, industrial manufactures, agricultural companies, steel processors, and automotive companies, among others. It competes with other railroad companies, including Union Pacific and CSX Corporation. In this note we discuss our stock price valuation for Norfolk Southern. You can look at our interactive dashboard analysis ~ Norfolk Southern Valuation: Expensive Or Cheap? ~ for more details.

#1. Estimating Norfolk Southern’s Total Revenues:

  • Total Revenues have increased from $9.9 billion in 2016 to $11.5 billion in 2018, and could grow 5% to $12.0 Billion in 2020.
  • Our Interactive Dashboard Analysis, How Does Norfolk Southern Make Money?, Provides An In Depth View Of The Company’s Revenues.

Comparing trends in Norfolk Southern’s Total Revenues with that of its peers

  • Note that 2019 sales for all three railroad companies are being impacted by lower exports, amid trade tensions, lower natural gas prices resulting in lower coal demand and shipments, and increased competition from the trucking industry.

#2. Deriving Norfolk Southern’s Adjusted Net Income:

  • Adjusted Net Income grew from $1.7 billion in 2016 to $2.7 Billion in 2018, and we expect it to be around $3.0 billion in 2020.
  • This growth will likely be led by margin expansion and higher revenues.
  • The jump in net income margin in 2017 can be attributed to the impact of the U.S. Tax Act.

#3. Determining Norfolk Southern’s EPS:

  • EPS has grown from $5.64 in 2016 to $9.51 in 2018, and we estimate it to be $11.61 in 2020.
  • EPS growth from 2018 can be attributed to higher Net Income and lower Shares Outstanding.

#4. Estimating Norfolk Southern’s Share Price:

  • Our Price Estimate of $199 For Norfolk Southern’s Stock is based on our Detailed Valuation Model, and implies a 17.1x P/E Multiple on expected 2020 EPS of $11.61.

Comparing Norfolk Southern’s Historical P/E Multiple With That of Its Peers

  • P/E Multiples are based on average share price for Q3, and reported (or expected) earnings for the following full year.
  • Note that 2016 P/E Multiples are lower for all three companies, given the tax related adjustments, that boosted the 2017 earnings.

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