Choose CSX at 30% less, not Norfolk Southern?

by Trefis Team
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NSC
Norfolk Southern
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Based on historical performance, Norfolk Southern (NYSE:NSC) appears to be less attractive compared to CSX Corporation (NYSE:CSX) in the current crisis. The current coronavirus crisis will likely have a significant impact on railroad companies, due to an overall decline in manufacturing, lower consumer demand amid lockdowns, lower oil prices impacting production and transportation of oil and related products, as well as lower natural gas prices resulting in lower demand for coal. Given that several countries are on lockdown, the exports are also expected to take a hit. This has impacted the stock prices of both these companies. Norfolk Southern’s stock has declined by about 32% since early February, compared to a 28% decline for CSX, after the WHO declared a global health emergency relating to Coronavirus.

With the global economy expected to be in recession, the railroad business will feel the heat from lower shipments, and this trend could continue beyond Q2, till the time consumer buying power increases. This explains the underperformance of these stocks vis-a-vis the S&P 500, which has declined around 20% since early February. While the outlook for both companies remains weak in the near term, we believe CSX could be a better bet in the current environment. We discuss more on this in our analysis, Is Norfolk Southern Expensive Or Cheap After A -32% Move vs. CSX?, which compares the stock price performance and fundamentals of Norfolk Southern and CSX over the last few years.

CORONAVIRUS CRISIS: Since early February, Norfolk Southern stock has moved -32.5% compared to -27.9% for CSX.

  • Norfolk Southern’s stock has declined by about 32% since early February, compared to a 28% decline for CSX, after the WHO declared a global health emergency relating to Coronavirus.
  • Both, Norfolk Southern and CSX stock, fell 20% since March 8th, as the U.S. cases accelerated.

HISTORICAL PERFORMANCE: From 2009-2019 Norfolk Southern stock has grown at 0.8x the rate of CSX

  • Norfolk Southern stock went from $41.34 at the end of 2009 to $193.28 at the end of 2019, representing a change of 367.5%.
  • During the same time period, CSX went from $13.23 to $72.11 representing a change of 445%.
  • This implies that Norfolk Southern stock grew at 0.8x the rate of CSX.

ANALYSIS:

How do valuations for Norfolk Southern and CSX compare, based on the review of fundamentals?

  • P/E Ratio: Based on trailing 2019 P/E ratios, NSC stock looks expensive compared to prior years and comparable to CSX.
  • Norfolk Southern’s current P/E ratio of 12.0 is comparable to 11.9 for CSX.

Historical Revenue and EPS Growth: While Norfolk Southern and CSX saw comparable revenue decline of around 1%, CSX posted better EPS growth between 2014 and 2019

  • Norfolk Southern’s 2014-19 annualized revenue growth of <-1% is comparable with 2014-19 CSX annualized revenue growth rate of -1.2%. Our interactive dashboard analysis on CSX Revenues provides more details.
  • Norfolk Southern’s 2014-19 annualized EPS growth of 10% is 0.6x that of the 2014-19 CSX annualized EPS growth rate of 17%.

Conclusion

  • Both the companies’ stocks have underperformed through the crisis, thus far, and CSX could see a larger upside if the health crisis abates, considering its EPS growth has been higher than Norfolk Southern. CSX’s P/E ratio is lower compared to its own historical P/E ratio, and also slightly lower than that of Norfolk Southern. While both the companies have been focused on reducing their operating ratio, CSX has been more successful with its strategies, as it posted a 1000 bps decline in its operating ratio from 69.2% in 2016 to 58.4% in 2019, as compared to Norfolk Southern’s 500 bps decline from 69.6% to 64.7% over the same period. As such, we believe that CSX will be able to better cope with the crisis by managing its expenses.

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