Norfolk Southern Stock Has Run Out Of Steam
After an 82% rise since the March 23 lows of this year, at the current price of around $217 per share we believe Norfolk Southern’s stock (NYSE: NSC) has reached its near-term potential. NSC stock has rallied from $119 to $217 off the recent bottom compared to the S&P which moved 54%, with the resumption of economic activities as lockdowns are gradually lifted. NSC stock is also up roughly 60% from levels seen in early 2018, two years ago.
NSC stock is 4% above the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year.
Some of the rise of the last 2 years is justified by the roughly 7.1% growth seen in Norfolk Southern’s revenues from 2017 to 2019. While the company’s Net Margins on a GAAP basis contracted from 51.2% to 24.1%, margins were higher in 2017 due to one-time tax adjustments related to changes in the tax law. On an adjusted basis, Norfolk Southern’s margins actually improved from 18.2% to 24.1%.
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With the steady revenue and earnings growth over recent years, Norfolk Southern’s P/E multiple has also expanded. We believe the stock is vulnerable to downside risk after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard – What Factors Drove 59% Change in Norfolk Southern Stock between 2017 and now? – has the underlying numbers.
Norfolk Southern’s P/E multiple changed from 7x in 2017 to 18x in 2019. While the company’s P/E is now 21x, there is a downside risk when the current P/E is compared to levels seen in the past years. P/E of 15x at the end of 2018 and 18x as recently as late 2019.
So what’s the likely trigger and timing for downside?
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