Pick Either Norfolk Southern Stock Or This Travel Company: Both May Offer Similar Returns

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Norfolk Southern

We believe that railroad company Norfolk Southern stock  (NYSE: NSC) and travel company Booking Holdings stock (NASDAQ: BKNG) will likely offer similar returns over the next three years. Although these companies are from different sectors, we compare them because they have a similar revenue base. The decision to invest often comes down to finding the best stocks within the ambit of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. However, from a P/S ratio perspective, Booking stock is trading at a slightly higher valuation of 6x trailing revenues, compared to around 5x for Norfolk Southern. Since these stocks are from different sectors, a direct comparison of P/S may not be helpful. We compare the current multiples with the historical ones in the sections below.

If we look at stock returns, BKNG stock has fared slightly better with a 2% fall in the last twelve months, compared to an 8% decline for Norfolk Southern and an 8% decline for the broader S&P500 index. There is more to the comparison, and in the sections below, we discuss the possible returns for NSC and BKNG in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Norfolk Southern vs. Booking HoldingsWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Booking’s Revenue Growth Is Better

  • Both companies posted double-digit sales growth over the last twelve months. Still, Booking’s revenue growth of 74% is much higher than 11% for Norfolk Southern.
  • Looking at a longer time frame, Norfolk Southern’s sales rose 13% to $12.7 billion in the last twelve months, compared to $11.3 billion in 2019, while Booking saw its sales rise 6% to $16.0 billion in the last twelve months, vs. $15.1 billion in 2019.
  • 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 softer volume growth, it has benefited from a robust pricing environment clubbed with higher fuel surcharges, aiding the average revenue per carload. For perspective, Norfolk Southern’s total volume of carloads and intermodal units declined 10% between 2019 and 2022, while its average revenue per carload or unit rose 25%.
  • 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 will likely weigh on Norfolk Southern’s near-term performance.
  • Booking’s revenue growth was significantly impacted amid lockdowns and shelter-in-place restrictions during the pandemic. The 2020 sales plunged 54% to $6.8 billion from $15.1 billion in 2019.
  • With economies opening up globally, travel has picked up the pace, resulting in a sharp 73% spike in Booking’s sales over the last twelve months.
  • That said, Booking’s sales growth will also be impacted if the global economies see a slowdown in growth.
  • Our Norfolk Southern Revenue Comparison and Booking Holdings Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, both companies are expected to see revenue rise 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 3.3% for Norfolk Southern, compared to 3.5% for Booking Holdings, 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.
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  3. Will Norfolk Southern Stock Rebound To Its Pre-Inflation Shock Highs?
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2. Norfolk Southern Is More Profitable But Comes At An Extra Risk

  • Norfolk Southern’s operating margin of 43% over the last twelve months is much better than 31% for Booking.
  • This compares with 41% and 21% figures seen in 2019, before the pandemic, respectively.
  • If we look at the recent margin growth, Booking has fared better, with the last twelve months vs. last three-year margin change at 11%, compared to a -1% change for Norfolk Southern.
  • Norfolk Southern’s free cash flow margin of 36% is also higher than the 29% for Booking.
  • Our Norfolk Southern Operating Income Comparison and Booking Holdings Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Booking is better placed than Norfolk Southern.
  • Norfolk Southern’s 25% debt as a percentage of equity is much higher than 9% for Booking, while its 2% cash as a percentage of assets is lower than 41% for the latter, implying that Booking has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that Norfolk Southern has demonstrated better revenue growth over Booking in the last three years. It is more profitable and is currently trading at 4.7x trailing revenues vs. its last four-year average of 5.3x, implying little room for growth.
  • On the other hand, Booking has seen stellar revenue growth in the last twelve months and offers lower financial risk with a superior debt position and cash cushion. Booking is trading at 6.1x, trailing revenues, compared to its last four year average of 7.6x, implying more room for growth.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both Norfolk Southern and Booking are likely to offer similar returns over the next three years.
  • The table below summarizes our revenue and return expectation for both companies over the next three years and points to an expected return of 7% for Norfolk Southern over this period vs. a 5% expected return for Booking stock, based on Trefis Machine Learning analysis – Norfolk Southern vs. Booking Holdings – which also provides more details on how we arrive at these numbers.

While NSC and BKNG stock may offer similar returns, 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 8% in the last twelve months. 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 Feb 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 NSC Return 1% 1% 129%
 S&P 500 Return 2% 8% 86%
 Trefis Multi-Strategy Portfolio 3% 14% 260%

[1] Month-to-date and year-to-date as of 2/8/2023
[2] Cumulative total returns since the end of 2016

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