Will Norfolk Southern Stock Move Higher Following Q3 Results?

Norfolk Southern (NYSE: NSC) is scheduled to report its Q3 2021 results on Wednesday, October 27. We expect the company to likely post revenue in-line and earnings slightly above the street expectations. The revenue will trend higher driven by an expected increase in coal transportation as well as a rebound in merchandise freight, in our view. However, the margins in Q3 may face some pressure due to inflationary headwinds and rising labor costs. While we believe Norfolk Southern to navigate well in Q3 based on these factors, we find NSC stock to be appropriately valued at the current levels of $283, with limited room for growth. Our interactive dashboard analysis on Norfolk Southern’s Pre-Earnings has additional details.

(1) Revenues expected to be in-line with the consensus estimates

Trefis estimates Norfolk Southern’s Q3 2021 revenues to be around $2.7 billion, in-line with the consensus estimate. More than a 2x rise in natural gas prices over the last year or so has resulted in an increased demand for coal, and the U.S. coal production is estimated to grow 10% y-o-y to 588 million short tons for the full year 2021. ^[1]  This will aid the coal transportation demand for railroad companies, including Norfolk Southern. The trucking industry still faces driver shortages, and railroad companies likely benefited from this with some of the trucking business shifting to intermodal. The company’s merchandise freight is also expected to see growth with a recovery in economic activity compared to Q3 of last year. Looking back at Q2 2021, revenues surged 34% to $2.8 billion, with strong growth across its three segments – Coal, Intermodal, and Merchandise. Our dashboard on Norfolk Southern’s Revenues offers more details on the company’s segments.

2) EPS likely to be slightly above the consensus estimates

Norfolk Southern’s Q3 2021 earnings per share (EPS) is expected to be $2.97 per Trefis analysis, slightly above the consensus estimate of $2.94. The company’s net income of $819 million in Q2 2021 reflected a solid 2x growth from its $392 million figure in the prior-year quarter. This can be attributed to higher revenues and 1,800 bps drop in operating ratio to 58%. Looking forward, inflationary pressure and rising wages likely impacted the company’s margins in Q3, weighing on overall earnings growth. That said, for the full-year 2021, we expect the EPS to be higher at $11.68 compared to $7.84 in 2020.

(3) Stock price estimate slightly above the current market price

Going by our Norfolk Southern’s Valuation, with an EPS estimate of $11.68 and a P/E multiple of around 26x in 2021, this translates into a price of $304, which is slightly above the current market price of $285. The 26x figure compares with the levels of 30x figure seen as recent as late 2020.

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 may have only a little room for growth, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Canadian Pacific Railway vs. D R Horton.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

1. Short Term Energy Outlook, EIA [↩]