This Railcar Company May Offer Better Returns Over Norfolk Southern Stock

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We think that Trinity stock (NYSE: TRN), a provider of railcar products and services, currently is a better pick compared to Norfolk Southern stock (NYSE: NSC), given its comparatively lower valuation and better prospects. NSC stock trades at 6.2x trailing revenues, compared to 1.8x for TRN stock. We believe that this valuation gap is justified to some extent, given Norfolk Southern’s superior revenue growth and better profitability. While Norfolk Southern has seen a substantial rise in revenues since the lockdowns were lifted, Trinity faced headwinds in 2021 due to fewer railcar deliveries.

Looking at stock returns, TRN, with 13% returns over the last six months, has fared better than NSC, which is up 10%. This compares with a 5% fall in the broader S&P500 index. However, there is more to the comparison, and we believe Trinity stands out with higher expected returns than Norfolk Southern, as discussed in the sections below.  We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis – Norfolk Southern vs. Trinity IndustriesWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Norfolk Southern’s Revenue Growth Has Been Stronger

  • Norfolk Southern saw sales growth of 14% over the last twelve months versus -13% change for Trinity.
  • Looking at a longer time frame, Norfolk Southern’s sales declined at a CAGR of -0.3% to $11.1 billion over the last twelve-month period, compared to $11.5 billion in 2018, while Trinity’s sales fell at a CAGR of -13.4% to $1.5 billion from $2.5 billion over the same period.
  • For Norfolk Southern, the recent revenue growth has been impacted by a decline in demand for automotive shipments owing to the impact of the semiconductor chip shortage on the overall automotive production, while its coal shipments have been trending higher due to rising natural gas prices, a trend expected to continue in the near term.
  • Fewer railcar deliveries and pricing pressures have impacted Trinity’s sales. A decline in the volume of railcar modifications weighed on its maintenance services business.
  • Our Norfolk Southern Revenue and Trinity Industries Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Trinity’s revenue is expected to grow at a faster pace compared to Norfolk Southern over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 27% for Trinity, aided by the company’s guidance of 40-50K annual railcar deliveries for the industry in the coming years, compared to a 5% CAGR for Norfolk Southern, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Norfolk Southern Is More Profitable But Comes At An Extra Risk

  • Norfolk Southern’s operating margin of 45.7% over the last twelve months is much better than 16.9% for Trinity.
  • However, if we look at the recent margin growth, Trinity has fared better than Norfolk Southern, with the last twelve months vs. last three-year margin change at 9.4%, compared to 4.6% change for Norfolk Southern.
  • Norfolk Southern’s free cash flow margin of 38% is also a tad below the 41% for Trinity.
  • Historically, Norfolk Southern’s operating margins have been superior compared to Trinity. Our Norfolk Southern Operating Income and Trinity Industries Operating Income dashboards have more details.
  • Looking at financial risk, Norfolk Southern is better placed than Trinity. Norfolk Southern’s 21% debt as a percentage of equity is much lower than 167% for Trinity, while its 2% cash as a percentage of assets is higher than <1% for the latter, implying that Norfolk Southern has a better debt and cash position.

3. The Net of It All

  • We see that Norfolk Southern has demonstrated better revenue growth and profitability over Trinity, and it comes at a lower financial risk. However, the latter is available at a relatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe TRN is currently the better choice of the two. Trinity is expected to see strong revenue growth, driven by an overall increase in railcar demand over the next few years.
  • The table below summarizes our revenue and return expectation for Norfolk Southern and Trinity over the next three years and points to an expected return of 26% for TRN over this period vs. 5% expected return for NSC stock, implying that investors are better off buying TRN over NSC, based on Trefis Machine Learning analysis – Norfolk Southern vs. Trinity – which also provides more details on how we arrive at these numbers.

While TRN stock is likely to outperform NSC stock in the future, it is helpful to see how Norfolk Southern’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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

Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
NSC Return 5% -9% 150%
TRN Return 11% 6% 63%
S&P 500 Return -3% -11% 90%
Trefis MS Portfolio Return -3% -13% 243%

[1] Month-to-date and year-to-date as of 3/11/2022
[2] Cumulative total returns since the end of 2016

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