We believe that Old Dominion Freight Line stock (NASDAQ: ODFL) is currently a better pick compared to Norfolk Southern stock (NYSE: NSC), despite it being a tad more expensive of the two, trading at 5.4x trailing revenues, compared to 4.8x for Norfolk Southern. The gap in the valuation of these two companies can be attributed to Old Dominion Freight Line’s superior revenue growth and better financial position, as discussed below.
Looking at stock returns, NSC has fared marginally better than ODFL, but both have underperformed the broader indices. NSC stock is down 19% YTD, ODFL is down 23%, and the S&P500 index has declined 17%. While both companies will likely see top-line expansion over the coming years, Old Dominion Freight Line is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe ODFL stock will offer better returns than NSC stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Norfolk Southern vs. Old Dominion Freight Line: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Old Dominion Freight Line’s Revenue Growth Is Better
- Both companies posted double-digit sales growth over the last twelve months. Still, Old Dominion Freight Line’s revenue growth of 24.8% is higher than 12.9% for Norfolk Southern.
- Looking at a longer time frame, Norfolk Southern’s sales declined at an average rate of -0.3% to $11.1 billion in 2021, compared to $11.5 billion in 2018, while that of Old Dominion Freight Line’s sales rose at 10.1% to $5.3 billion in 2021, compared to around $4.0 billion in 2018.
- Norfolk Southern’s revenue growth was adversely impacted in 2020 due to the pandemic, but the recovery in 2021 was strong.
- Although the company continues to see a decline in demand for automotive shipments owing to the impact of the semiconductor chip shortage on the overall automotive production, its coal freight has been trending higher due to rising natural gas prices, bolstering the overall coal demand, and a robust pricing environment clubbed with higher fuel surcharges, aiding the average revenue per carload. This trend is expected to continue in the near term.
- However, there are near-term headwinds for the company. The demand for railroad business can primarily be linked to economic growth. The current high inflationary environment, rising interest rates, and fears of a slowing economy have weighed on railroad stocks.
- Barring 2020, Old Dominion Freight Line’s revenue has been steadily rising with increased demand for the trucking industry. Of late, it has benefited from a rise in volume driven by increased demand, available network capacity, and better pricing, including the impact of higher fuel surcharges.
- The driver shortage is a well-known issue for the trucking industry, and it 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 will likely remain on the higher side going forward, driving Old Dominion Freight Line’s revenue growth.
- Our Norfolk Southern Revenue and Old Dominion Freight Line Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Old Dominion Freight Line’s revenue is expected to grow faster than Norfolk Southern’s 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 9.2% for Old Dominion Freight Line, compared to a just 2.8% CAGR for Norfolk Southern, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 three years before Covid to simulate a 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.
- Will Norfolk Southern Stock Move Higher Following Q3 Results?
- Will Norfolk Southern Stock Move Higher Following Q2 Results?
- Should You Buy Norfolk Southern Stock At $240?
- Will Norfolk Southern Stock Move Higher Following Q1 Results?
- This Railcar Company May Offer Better Returns Over Norfolk Southern Stock
- This Stock Is A Better Pick Over Norfolk Southern
2. Norfolk Southern Is More Profitable But Comes At An Extra Risk
- Norfolk Southern’s operating margin of 44.6% over the last twelve months is much better than 13.5% for Old Dominion Freight Line.
- This compares with 40.7% and 19.9% figures seen in 2019, before the pandemic, respectively.
- If we look at the recent margin growth, Norfolk Southern has fared better than Old Dominion Freight Line, with the last twelve months vs. last three-year margin change at 3.4%, compared to -9.5% change for the latter.
- Norfolk Southern’s free cash flow margin of 35.1% is also higher than the 22.9% for Old Dominion Freight Line.
- Our Norfolk Southern Operating Income and Old Dominion Freight Line Operating Income dashboards have more details.
- Looking at financial risk, Old Dominion Freight Line is better placed than Norfolk Southern.
- Norfolk Southern’s 26.4% debt as a percentage of equity is much higher than 0.5% for Old Dominion Freight Line, while its 3.2% cash as a percentage of assets is lower than 10.3% for the latter, implying that Old Dominion Freight Line has a better debt position and it has more cash cushion.
3. The Net of It All
- We see that Old Dominion Freight Line has demonstrated better revenue growth over Norfolk Southern over the last twelve months and the last three years. It comes at a lower financial risk with a better debt position and more cash cushion. On the other hand, Norfolk Southern is more profitable, and it 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 Old Dominion Freight Line is currently the better choice of the two, despite it being the more expensive of the two.
- The table below summarizes our revenue and return expectation for both companies over the next three years and points to an expected return of 13% for Old Dominion Freight Line over this period vs. a 1% expected return for Norfolk Southern stock, implying that investors are better off buying ODFL over NSC, based on Trefis Machine Learning analysis – Norfolk Southern vs. Old Dominion Freight Line – which also provides more details on how we arrive at these numbers.
While ODFL stock may outperform NSC, it is helpful to see how Norfolk Southern’s Peers and Old Dominion Freight Line’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 at 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 19% 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.
|S&P 500 Return||0%||-17%||77%|
|Trefis Multi-Strategy Portfolio||0%||-16%||233%|
 Month-to-date and year-to-date as of 9/2/2022
 Cumulative total returns since the end of 2016