Should You Buy Norfolk Southern Stock At $240?
Norfolk Southern stock (NYSE: NSC), which currently trades at $237 per share, looks like a good investment opportunity. The stock is down 19% year-to-date, slightly underperforming the broader S&P 500, which remains down by about 16% over the same period.
There are a couple of trends driving the stock lower of late. The demand for railroad business can primarily be linked to economic growth. The current high inflationary environment, rising interest rates, and recession fears have weighed on railroad stocks. Some prominent Wall Street analysts have recently downgraded their rating on Norfolk Southern, citing the concerns over economic growth.
Looking at some of the individual segments, Intermodal volume is still lower than pre-pandemic levels, but a strong pricing environment has resulted in higher average revenue per unit of $771 in 2021, compared to $671 in 2019, before the pandemic. Coal has positive momentum on its side with rising production in the U.S. and increased global demand due to higher natural gas prices. In fact, Q1 2022 coal revenue was up a solid 25%, driven by a 25% rise in average revenue per carload and a 1% drop in volume. Norfolk Southern has managed to grow its average revenue per carload for all the segments in the recent past, which has been the company’s key revenue growth driver. Furthermore, the company managed to bring its operating ratio down to 60.1% in 2021, compared to 69.3% in 2020 and 64.7% in 2019. As of Q1 2022, the figure increased 130 bps y-o-y to 62.8%.
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Now, the concerns around economic growth are genuine, and railroad companies may likely see some pain on the demand side over the next few quarters. However, we remain bullish on NSC stock, especially given the recent correction. At current levels of around $237 per share, NSC stock trades at under 17x projected 2022 earnings of $13.98 on a per-share basis, which compares with an average of over 22x in the last three years.
Although Norfolk Southern’s operating ratio is expected to improve over the coming years, it is likely to face headwinds in the near term. Recently, its peer – Union Pacific – announced that it may miss the full-year margin it has guided for, citing inflation worries. Still, we value NSC stock at about $310 per share, which is roughly 30% ahead of the current market price. See our analysis on Norfolk Southern Valuation for more details on what’s driving our valuation for the company. Also, see our analysis on Norfolk Southern Revenue for more details on the company’s key revenue streams and how they have been trending.
While NSC stock looks undervalued, 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.
Furthermore, the Covid-19 crisis 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 CSX vs. Simpson Manufacturing.
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