What To Expect From Norfolk Southern’s Q1?

NSC: Norfolk Southern logo
Norfolk Southern

Norfolk Southern stock (NYSE: NSC) is scheduled to report its Q1 2021 results on Wednesday, April 28. We expect Norfolk Southern to likely post revenue and earnings above the street expectations, due to higher demand for railroad, especially intermodal, amid continued driver shortages being faced by the trucking industry. Norfolk Southern, in particular, derives more than a quarter of its revenues from the Intermodal segment. The overall rebound in the economy likely aided the freight revenues for its Merchandise segment, as well. We expect the company to navigate well based on these trends over the latest quarter.

However, our forecast indicates that Norfolk Southern’s valuation is around $264 per share, which is 6% below the $281 levels on the evening of Monday 26th April, implying the stock appears to be fully valued at the current levels of $281. Our interactive dashboard analysis on Norfolk Southern’s Pre-Earnings has additional details.

(1) Revenues expected to be slightly above the consensus estimates

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Trefis estimates Norfolk Southern’s Q1 2021 revenues to be around $2.7 Bil, slightly above the $2.6 Bil consensus estimate. The gradual opening up of economies and vaccination programs in the U.S. has resulted in a pickup in economic activities, and this should bode well for Norfolk Southern’s freight business. The trucking industry still faces a driver shortage, and railroad companies, including Norfolk Southern, likely benefited from this with higher intermodal revenues. Looking back at Q4 2020, the company’s revenue declined 4% to $2.6 Bil, as a 5% growth in intermodal business was more than offset by a 20% decline in coal freight and a 5% decline in merchandise freight. While we expect coal freight to continue to face headwinds in the near term, amid lower demand for power and favorable natural gas prices, the demand for merchandise freight is likely to pick up with the opening up of the economy. Our dashboard on Norfolk Southern’s Revenues offers more details on the company’s segments.

2) EPS also likely to be above the consensus estimates

Norfolk Southern’s Q1 2021 earnings per share (EPS) is expected to be $2.60 per Trefis analysis, slightly above the consensus estimate of $2.54. The company’s net income of $671 Mil in Q4 2020 reflected a modest growth from its $666 Mil figure in the prior-year quarter. This can be attributed to lower operating costs, primarily fuel expenses, given the favorable prices in 2020, compared to that in 2019. We expect the margins to further improve going forward, driven by the company’s focus to reduce its operating ratio from 69% in 2020 to less than 60%, as the current Covid-19 crisis winds down. For the full-year 2021, we expect the EPS to be $11.30 compared to $9.25 in 2020.

(3) Stock price estimate 6% below the current market price

Going by our Norfolk Southern’s Valuation, with an EPS estimate of $11.30 and a P/E multiple of around 23x in 2021, this translates into a price of $264, which is 6% below the current market price of $281. At the current price of $281, Norfolk Southern is trading at 25x its expected EPS of $11.30 in 2021, and this compares with the P/E multiple of 16x and 19x figures seen in 2018 and 2019, respectively. However, it is lower than the 30x figure seen in late 2020, as the NSC stock along with the broader markets rallied in the hopes of a quicker economic rebound.

Although the continued challenges in the coal and other energy freight business will have some impact on Norfolk Southern’s overall revenue growth rate in the near term, we believe the demand for the merchandise and intermodal freight will see a rebound, driven by the resumption of economic activities and increased demand for transportation. However, these factors are already priced in the current stock value of $281 per share, in our view, implying there is not much room for growth for NSC stock in the near term.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Earnings for the full year

While NSC stock looks fully valued, it is helpful to see how its peers stack up. Check out Canadian Pacific Railway Peer Comparisons to see how ISRG stock compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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