What’s Behind The 85% Jump In Norfolk Southern’s Stock In The Past 3 Years?

by Trefis Team
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Norfolk Southern’s (NYSE:NSC) stock price grew over 85% from around $110 levels in Q1 2017 to around $205 currently. This rise was primarily driven by net income margin growing 43% over this period, driven by a slower expense growth. Additionally, the company’s top line has also expanded due to healthy growth in merchandise and intermodal freight. We break down the movement in Norfolk Southern’s stock price into four factors: growth in revenue, change in share count, expansion in P/E multiple, and change in net income margin. You can look at our interactive dashboard analysis on Norfolk Southern’s stock price growth for more details.

#1. Revenue Growth

  • Norfolk Southern’s Total Revenue has grown 14.2% from $9.9 billion in 2016 to $11.3 billion in 2019, and it is expected to grow slightly to around $11.4 billion in 2020.
  • Revenue growth of about $100 million in 2020 to be driven by about $205 million growth from Merchandise, $42 million from Intermodal, offset by $148 million decline from coal.
  • Coal revenue has declined over the recent past to $1.7 billion in 2019, and it is estimated to decline to $1.5 billion in 2020. The decline in coal revenues can be attributed to favorable natural gas prices, resulting in lower demand for coal as a source of energy. As such, the shipments and pricing for railroad companies have been impacted, and this trend is expected to continue in the near term.
  • Merchandise revenue has been on a rise, and we expect this trend to continue in 2020, led by growth in the overall U.S. economy, and industrial production. Intermodal revenue in 2019 was impacted by the increased trucking capacity in the U.S. and a tough comparison from 2018, where the trucking industry faced capacity constraints. Going forward, Intermodal segment should show steady growth.
  • Look at our interactive dashboard Norfolk Southern Revenues for more details on the company’s revenue and performance.

#2. Net Income Growth

  • Norfolk Southern’s net income grew from $1.7 billion in 2016 to $2.7 billion in 2019.
  • This can be attributed to higher revenues and elevated margins.
  • Net income margin increased from 16.9% in 2016 to 51.2% in 2017. This was followed by a drop to 23.3% in 2018 and rise to 24.1% in 2019.
  • A sharp rise in 2017 was driven by one-time tax benefits due to the TCJ Act. We expect net income to grow slightly to $2.8 billion in 2020.
  • We discuss the factors that impacted the margin in the section below.

#2.1 EPS Growth 

  • EPS has risen steadily over the years from $5.64 in 2016 to $10.25 in 2019.
  • The EPS spiked to $18.62 in 2017 due to the impact of the TCJ Act as highlighted above.
  • We expect the EPS figure to further increase to $11.10 in 2020.
  • Shares outstanding have declined from 296 million in 2016 to 254 million in 2019, due to the company’s share repurchases.

#3. P/E Multiple Expansion

  • P/E multiple for Norfolk Southern has fluctuated over the recent years.
  • Norfolk Southern’s P/E multiple expanded from 19.5x in 2016 to 20.0x in 2019. This compares with Union Pacific, which saw its P/E multiple expand slightly from 19.8x to 21.7x, while CSX’s P/E multiple declined from 24.2x to 18.5x over this period.
  • The current P/E is also higher than that for CSX but lower than Union Pacific’s.
  • The decline in 2017 can again be attributed to higher GAAP EPS reported due to the tax adjustments.
  • Note that P/E multiples are calculated using average stock price in Q1 of given year, and GAAP EPS for the trailing full year.

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