We think that Norfolk Southern stock (NYSE: NSC) currently is a better pick compared to Old Dominion Freight Line (NASDAQ: ODFL), despite Old Dominion Freight Line’s revenue growing at a faster pace over the recent years. Our view stems from the comparatively lower valuation of Norfolk Southern and its better profitability. While NSC trades at 6x its trailing revenues, ODFL is trading around 8x. Even if we were to look at other valuation metrics, ODFL stock appears to be more expensively priced with 32x P/EBIT ratio and around 43x P/E ratio, compared to 16x and 24x for NSC stock, respectively.
Although both the companies saw a rise in revenue over the recent quarters, led by the economic recovery, the growth has been better for Old Dominion Freight Line, aided by high demand for less-than-truckload (LTL) shipments as well as average revenue per shipment, with a surge in demand for goods due to the opening up of the economy. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue and operating margin growth. Our dashboard Norfolk Southern vs Old Dominion Freight Line: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Old Dominion Freight Line’s Revenue Growth Has Been Stronger
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Old Dominion Freight Line’s revenue growth over the last twelve month period was stronger than Norfolk Southern (24% vs. 10%), given a high demand for the trucking industry at large. Even if we were to look at the three-year average revenue growth, Old Dominion Freight Line’s CAGR of 6% is higher than the CAGR of -2% for Norfolk Southern. Barring 2020, Old Dominion Freight Line’s revenue has been on a steady rise with increased demand for the trucking industry. For Norfolk Southern, the revenue growth was impacted during the pandemic due to lower production across various industries, resulting in lower demand for railroad transportation. Our dashboard on Norfolk Southern’s revenues offers more details on the company’s segments.
Looking forward, Old Dominion’s revenues are expected to grow over 30% in 2021, but the growth rate will likely slow to low double-digits next year, as per the consensus estimates. For Norfolk Southern, revenues are expected to grow in low teens in 2021 and slow to high single digits in 2022. Both the companies are benefiting from the opening up of the economy post pandemic. Driver shortage is a well known issue for the trucking industry, and the industry at large is unable to meet the rising demand. Note that 72% of the entire U.S. freight is moved on trucks. Overall, the demand for the trucking industry is likely to remain robust going forward as well, and Old Dominion Freight Line being one of the largest LTL carriers in North America, should benefit form it.
For railroad companies, including Norfolk Southern, the disruption in automotive production due to chip shortages will impact the automotive freight in the near term. However, other industrial products freight is likely to rise. Coal freight, in particular, is expected to remain strong in the near term as a large 2x rise in natural gas prices in 2021 has resulted in an increased demand for coal. In fact, the share of electricity generation produced by natural gas is expected to fall to 36% in 2021 and 35% in 2022, compared to 39% in 2020, while the use of coal in electricity generation will rise, implying an increased production, and, in turn, increased demand for its transportation.
2. Norfolk Southern Is More Profitable
Unlike the trend seen in revenue growth, Norfolk Southern’s operating margin of 40% over the last twelve month period is much better than 26% for Old Dominion Freight Line. Even if we were to look at the last three-year average operating margin, Norfolk Southern’s 33% figure tops 21% for Old Dominion Freight Line. Both the companies have seen a rise in operating margins in the recent past. Norfolk Southern’s operating margin of 40% over the last twelve month period compares with 35% in 2019, before the pandemic. The current operating margin of 26% for Old Dominion Freight Line is lower compared to Norfolk Southern, and it compares with the 20% figure in 2019.
The Net of It All
Now that nearly 60% of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, both the companies are expected to see steady revenue growth going forward. However, any large spike in total number of Covid-19 cases due to the spread of newer variants can disrupt the economic growth and impact the earnings growth for both the companies.
Now, Norfolk Southern’s current valuation is surely more attractive than that of Old Dominion Freight Line, and it is also more profitable. However, if we were to look at financial risk, Old Dominion Freight Line has a better debt and cash position, with its debt as percentage of equity of <1% vs. 20% for Norfolk Southern, and cash as percentage of assets of 12%, compared to 4% for Norfolk Southern, implying that NSC stock has higher financial risk, compared to ODFL stock. That said, we still believe that Norfolk Southern is a better pick among the two stocks, with higher risk, but much better profitability and a comparatively lower valuation.
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|S&P 500 Return||-2%||22%||105%|
|Trefis MS Portfolio Return||-2%||41%||281%|
 Month-to-date and year-to-date as of 12/7/2021
 Cumulative total returns since 2017