Despite a 15% fall year-to-date, Norfolk Southern stock (NYSE: NSC) has little room for growth. NSC stock has declined from over $290 in early January to around $205 in mid-October before rising to about $255 now. The YTD 15% fall for Norfolk Southern aligns with the -15% returns for the broader S&P500 index and its peers, CSX stock and Union Pacific stock, both down over 15%. Looking at the longer term, Norfolk Southern stock is up 70% from levels seen in late 2018, compared to around 65% returns for the S&P500 index.
This 70% rise for UNP stock since late 2018 was driven by: 1. the company’s P/S ratio, which rose 35% to 4.8x trailing revenues, from 3.5x in 2018, 2. a 14% fall in its total shares outstanding to 233 million, driven by share repurchases of around $7 billion between 2019 and 2021, and 3. Norfolk Southern’s revenue grew 7.9% to $12.4 billion over the last twelve months, compared to $11.5 billion in 2018. Our interactive dashboard, Why Norfolk Southern Stock Moved, has more details.
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Norfolk Southern’s freight revenue declined 2.8% between 2018 and 2021, as a 9.6% rise in average revenue per carload was more than offset by an 11.3% decline in the volume of carloads over this period. However, 2022 has been good so far. We forecast a 14.0% jump in freight revenue, driven by an expected 17.8% y-o-y rise in average revenue per carload, slightly offset by a 3.3% drop in the volume of carloads.
Furthermore, the company has been consistently improving its operating ratio, which fell to 60.1% in 2021, compared to 65.4% in 2018. However, given the higher inflation, costs have been higher this year, and the operating ratio has risen by 180 bps y-o-y to 61.8% for the nine months ending September 2022. The company’s bottom line increased 27.3% to $12.11 in 2021, compared to $9.51 in 2018, and we expect it to rise to $13.88 in 2022. This is much better than the company’s expected revenue rise of 10.8% over this period, primarily due to better-operating margins and share buybacks.
Looking forward, 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 recession fears have weighed on railroad stocks. Furthermore, there have been concerns about a railroad strike, as the unions have not been able to negotiate their labor contracts with the companies. The strike is averted now with the president signing the bill to impose a tentative contract deal reached in September, but some key unions did not accept that deal.
Looking at valuation, we find that NSC stock has little room for growth. We estimate Norfolk Southern’s valuation to be $260 per share, reflecting less than a 5% upside from its current market price of $254, implying that investors are likely to be better off waiting for a dip to enter NSC stock for more gains in the long-term. Our price estimate of $260 is based on a 19x forward earnings estimate of $13.88 per share, compared to the last four-year average of under 22x. We have assigned a slightly lower multiple than the last three-year average, given the near-term headwinds discussed above.
While NSC stock looks appropriately priced, 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 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 15% 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%||-15%||82%|
|Trefis Multi-Strategy Portfolio||1%||-17%||230%|
 Month-to-date and year-to-date as of 12/5/2022
 Cumulative total returns since the end of 2016