[Updated: 6/9/2021] NSC Stock Update
Norfolk Southern (NYSE: NSC) has seen its stock price rise 43% over the last one year, outperforming the broader markets, with the S&P500 up 32%. The company witnessed a decline in total volume of carloads shipped in 2020, owing to the impact of the Covid-19 pandemic on the overall transportation demand. Norfolk Southern reported its Q1 results in late April, with revenue of $2.6 billion, in-line with the prior year quarter. However, now that more than 42% of the U.S. population is fully vaccinated for Covid-19, the economy is expected to see a rebound, and it should bode well for the railroad companies, including Norfolk Southern.
Norfolk Southern is likely to see a pickup in demand across its segments – Merchandise, Intermodal, and Coal – over the coming quarters. While the overall rise in industrial production will bolster the demand for merchandise shipments, the expected increase in power consumption globally and a favorable comparison to the lows of last year will likely result in higher coal shipments over the coming quarters. Note that EIA forecasts 11% growth in the U.S. coal production in 2021.
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Also, the trucking industry drivers shortage issue will bode well for Norfolk Southern. While the driver shortage issue isn’t new, the Covid-19 pandemic has made the situation worse. There was a shortage of 60,000 drivers in the U.S. in early 2019, and that number likely went up during the pandemic. Railroad companies should benefit from this shortage as the customers can use intermodal business to cover the longer hauls. Under intermodal transportation, trains are used for the long-haul portion of the shipment, while trucks are used to deliver goods to the originating intermodal terminal as well as the final destination, in the case of domestic shipments.
Railroad companies have been focused on improving their intermodal infrastructure by adding new or expanding the existing inland terminals for the smooth transfer of containers between rail and truck. That said, only a small portion of trucking business can be converted to intermodal, given the average haul of trains is much higher. While opting for intermodal makes sense for the long distance shipments, the reliance is on trucks for small to medium hauls.
Norfolk Southern’s reliance on intermodal business is higher than some of the other railroad companies, with intermodal business accounting for 27% of the company’s total revenues in 2020. The company’s intermodal business saw a 6% volume growth in Q1, a trend expected to continue in the near term. Although these are positive developments for Norfolk Southern, and its stock has already appreciated 18% year-to-date, we believe that the stock has little more room for growth. Going by our revised Norfolk Southern Valuation of $290 per share, based on expected adjusted EPS of $11.50 for full year 2021 and a P/E multiple of 25x, there is over 5% upside potential for NSC stock.
[Updated: 4/27/2021] Norfolk Souther Q1 Earnings Preview
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
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.