Will Norfolk Southern Stock Move Higher Following Q2 Results?

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Norfolk Southern

Norfolk Southern (NYSE: NSC) is scheduled to report its Q2 2022 results on Wednesday, July 27. We don’t expect much movement in NSC stock, with the company expected to post mixed results. We expect the company to report revenue in line and earnings slightly above the street expectations. While the company should benefit from strong consumer demand and a shift toward lower-cost transportation alternatives, the weakness in manufacturing output and rising costs may weigh on its overall performance. The manufacturing output fell 0.1% in May and 0.5% in June after a rise of 0.8% in April. [1]

Furthermore, rising costs due to higher inflation will likely result in a rise in the company’s operating ratio. That said, our forecast indicates that NSC stock is undervalued at its current levels, as discussed below. Our interactive dashboard analysis of Norfolk Southern’s Earnings Preview has additional details.

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(1) Revenues expected to be aligned with the consensus estimates

  • Trefis estimates Norfolk Southern’s Q2 2022 revenues to be around $3.1 billion, reflecting an 11% y-o-y growth and aligning with the consensus estimate.
  • The company should benefit from strong demand for coal, given rising natural gas prices. Henry Hub natural gas price has increased to $6.3 per million British thermal units (MMBtu) currently, compared to $3.7 toward the end of 2021.
  • U.S. coal production of 289 million short tons (MMst) in the first half of 2022 reflects a 2% rise from the prior-year period. [2]
  • Higher inflation has resulted in some shippers turning to low-cost alternatives, such as railroads. With rising costs, the company should be able to expand its average revenue per carload, boding well for its top-line growth.
  • However, due to the issue of the semiconductor chip shortage, automotive shipments may continue to face slower growth.
  • Our dashboard on Norfolk Southern Revenues has more details on the company’s segments.
  • Norfolk Southern reported a 10% rise in revenue to $2.9 billion in Q1 2022, led by a 16% rise in average revenue per carload, which more than offset a 5% fall in the total volume of carloads.

(2) EPS likely to be above the consensus estimates

  • Norfolk Southern’s Q2 2022 earnings per share (EPS) is expected to be $3.52 per Trefis analysis, five cents more than the consensus estimate of $3.47.
  • The company’s net income of $703 million in Q1 2022 reflected a 4% rise from its $673 million figure in the prior-year quarter, driven by higher revenues, partly offset by a 130 bps y-o-y rise in operating ratio to 62.8%.
  • With rising costs, and a tough comparison with the prior-year quarter, which saw an 1800 bps y-o-y drop in operating ratio to 58.3%, we believe the operating ratio will trend higher in Q2 2022.
  • For the full-year 2022, we expect the EPS to be higher at $13.98 compared to EPS of $12.11 in 2021.

(3) NSC stock looks undervalued

  • We estimate Norfolk Southern’s Valuation to be around $310 per share, which reflects a 36% premium to the current market price of $228.
  • At its current levels, NSC stock is trading at just 16x forward earnings, compared to the last three-year average of 22x, making the stock attractive from a valuation point of view.
  • Furthermore, if the company reports upbeat Q2 results and provides an outlook better than the street estimates, the P/E multiple will likely be revised upward, resulting in higher levels for NSC stock.

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. Amerco.

With inflation rising and the Fed raising interest rates, among other factors, NSC stock has fallen 22% this year. Can it drop more? See how low Norfolk Southern stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jul 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 NSC Return 0% -23% 111%
 S&P 500 Return 1% -20% 71%
 Trefis Multi-Strategy Portfolio 3% -21% 214%

[1] Month-to-date and year-to-date as of 7/18/2022
[2] Cumulative total returns since the end of 2016

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Notes:
  1. U.S. manufacturing production falls for second straight month, Reuters, July 15, 2022 []
  2. Short Term Energy Outlook, EIA []