Which Is A Better Railroad Pick – Norfolk Southern Stock Or CSX?

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NSC: Norfolk Southern logo
NSC
Norfolk Southern

We believe Norfolk Southern stock (NYSE: NSC) is a better railroad pick than its peer, CSX stock (NYSE: CSX). Norfolk Southern trades at a lower valuation multiple of 3.6x revenues vs. 4.1x for CSX. This gap in valuation multiple can be attributed to CSX’s superior revenue growth and profitability.

Interestingly, NSC has had a Sharpe Ratio of 0.4 since early 2017, while the figure stood at 0.5 for CSX, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Looking at stock returns, NSC has underperformed with -17% returns this year, compared to a 0% gain for CSX and a 17% rise in the S&P500 index. NSC stock has been weighed down this year owing to the derailment of a train carrying toxic materials in East Palestine, Ohio, in February of this year. There is more to the comparison, and in the sections below, we discuss why we believe that NSC will offer better returns than CSX 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. CSXWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

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1. CSX’s Revenue Growth Is Better

  • CSX’s top-line expansion has fared better than Norfolk Southern in recent years. While CSX’s revenue rose at an 8.5% average annual rate in the last three years, Norfolk Southern’s sales grew at an average rate of 5.0%.
  • 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%.
  • CSX’s revenue growth between 2019 and 2021 can partly be attributed to its Trucking segment sales. CSX acquired Quality Carriers – a trucking company focused on bulk liquid chemicals transportation – in 2021, bolstering revenue growth.
  • Like Norfolk Southern, CSX has benefited from a robust pricing environment. CSX’s total volume of carloads remained flat between 2019 and 2022, while its average revenue per unit rose 14%, driving its freight revenue growth.
  • Our Norfolk Southern Revenue Comparison and CSX Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, sales for both companies are expected to see tepid growth in the near term due to concerns over rising microenvironment risks, elevated costs, a continued rise in interest rates, and a potential recession.

2. CSX Is More Profitable 

  • Norfolk Southern’s operating margin rose from 35.3% in 2019 to 37.7% in 2022, while CSX’s operating margin increased marginally from 35.4% to 35.6% over this period.
  • Looking at the last twelve-month period, CSX’s operating margin of 34.5% fares better than 29.5% for Norfolk Southern. Norfolk Southern has taken a $1.2 billion charge in the first half of 2023 related to the Ohio Incident, resulting in operating margin contraction.
  • Our Norfolk Southern Operating Income Comparison and CSX Operating Income Comparison dashboards have more details.
  • Looking at financial risk, CSX fares better. While Norfolk Southern’s 33% debt as a percentage of equity is higher than 29% for CSX, the latter’s 3% cash as a percentage of assets is higher than 1% for Norfolk Southern, implying that CSX has a better debt position and more cash cushion.

3. The Net of It All

  • We see that CSX has seen better revenue growth, is more profitable, and has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Norfolk Southern is the better choice of the two.
  • NSC is currently trading at 3.6x revenues vs. the last five-year average of 4.7x. In contrast, CSX stock trades at 4.1x revenues vs. the last five-year average of 5.0x.
  • Norfolk Southern will likely return to the operating margin expansion once the issues related to the Ohio incident are behind us. The decline in NSC stock in recent months gives an opportunity to investors to enter for long-term gains.
  • Our Norfolk Southern (NSC) Valuation Ratios Comparison and CSX (CSX) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 14% for NSC over this period vs. a 6% expected return for CSX, based on Trefis Machine Learning analysis – Norfolk Southern vs. CSX – which also provides more details on how we arrive at these numbers.

While NSC stock may outperform CSX, 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.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 NSC Return 0% -17% 89%
 CSX Return 2% 0% 158%
 S&P 500 Return 0% 17% 101%
 Trefis Reinforced Value Portfolio -3% 28% 556%

[1] Month-to-date and year-to-date as of 9/18/2023
[2] Cumulative total returns since the end of 2016

 

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