Time To Book Profits In Norfolk Southern Stock After A 90% Rally?

by Trefis Team
Norfolk Southern
Rate   |   votes   |   Share

We believe there may be better investment places for your money than Norfolk Southern stock (NYSE:NSC) at the present time. NSC stock trades at $221 currently and it has gained 16% in value so far this year. It traded at a pre-Covid high of $207 in February, and it is at slightly above that level now. Also, NSC stock has gained 88% from the low of $118 seen in March 2020, as the Fed stimulus largely put investor concerns about the near-term survival of companies to rest. With the economy barely limping back to normalcy following Covid-19 related shutdowns, and unemployment at multi-decade highs in the U.S., the industrial production has been impacted, implying a reduced demand for transportation. While the U.S. industrial production rose 0.4% in August, marking a fourth consecutive monthly increase, the index in August was still 7.3% below its pre-pandemic February levels. [1]

Coal in particular continues to see headwinds from falling natural gas prices. Norfolk Southern has seen a a massive 44% cut in Coal Freight revenues in the first half of 2020, primarily led by lower volume. There has been an increase in demand for cleaner forms of energy and the demand as well as production of coal has been on a decline for the last few years. The U.S. Coal production is estimated to be 511 mst (million short tons) in 2020, compared to 755 mst in 2018. Similarly, coal consumption has also plunged and it is now estimated to be 475 mst in 2020 compared to 688 mst in 2018. [2] This decline can partly be attributed to favorable natural gas prices, with the Henry Hub spot price plunging over 60% from $3.69 per million Btu in early 2018 to $1.49 per million Btu currently. [3]

While the situation is changing on the ground with the gradual opening up of economies, in view of the strong rally in NSC stock since late March, we believe that the stock has little room for growth in the near future. Our conclusion is based on our detailed analysis of Norfolk Southern stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Norfolk Southern and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Norfolk Southern vs S&P 500 Performance Over 2007-08 Financial Crisis

NSC stock declined from levels of around $38 in September 2007 (pre-crisis peak for the markets) to levels of around $24 in March 2009 (as the markets bottomed out), implying NSC stock lost 37% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $41 in early 2010, rising by 69% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51%, followed by a recovery of 48%.

Norfolk Souther’s Fundamentals in Recent Years Look Strong

Norfolk Southern Revenues grew 7% from $10.6 billion in 2017 to $11.3 billion in 2019, primarily led by a strong growth in Intermodal segment. Though the revenue growth wasn’t high for Norfolk Southern, it managed to grow its EPS by a solid 56% from $6.61 in 2017 (after adjusting for one-time tax benefits associated with the changes in tax law) to $10.32 in 2019. This can primarily be attributed to the company’s focus on reducing its operating ratio, which declined from 66.6% to 64.7% over the same period. However, the company’s Q2 2020 revenues were 29% below the level seen a year ago, and the EPS figure for the quarter slid from $2.72 in Q2 2019 to $1.53 per share in Q2 2020.

Does Norfolk Southern Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Norfolk Southern’s total debt increased from $9.7 billion in 2016 to $12.7 billion at the end of Q2 2020, while its total cash increased from $956 million to $1.1 billion over the same period. The company also generated $1.8 billion in cash from its operations in the first six months of 2020, and it appears to be in a good position to weather the crisis.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Going by the historical performance and after the recent rally, we believe that NSC stock has little room for growth in the near future.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

  1. Industrial Production and Capacity Utilization – G.17 []
  2. Short Term Energy Outlook, EIA []
  3. Henry Hub Natural Gas Spot Price, EIA []
Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!