Norfolk Southern (NYSE: NSC) reported its Q3 results last month, with revenues meeting but earnings missing the street estimates. The company reported revenue of $2.97 billion and adjusted earnings of $2.65 per share, compared to the consensus estimates of $2.94 billion and $2.74, respectively. In this note, we discuss Norfolk Southern’s stock performance, key takeaways from its recent results, and valuation.
NSC stock has seen a decline of 20% from levels of $240 in early January 2021 to around $195 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the decrease in NSC stock has been far from consistent. Returns for the stock were 25% in 2021, -17% in 2022, and -21% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that NSC underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including UNP, HON, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NSC face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? From a valuation perspective, NSC stock looks like it has room for growth. We estimate Norfolk Southern’s Valuation to be $230 per share, reflecting more than 15% upside from its current levels of $195. This represents a 19x P/E multiple for NSC based on earnings expectation of $11.85 for the full year 2023. The 19x P/E ratio is lower than the last four-year average of 22x. We have assigned a slightly lower multiple compared to the historical average, taking into account fears of a potential recession and its impact on the railroad business and higher than anticipated costs associated with the Ohio derailment.
Norfolk Southern’s revenue of $3.0 billion in Q3 was down 11% y-o-y, primarily due to a 22% fall in intermodal revenue. Total volume was down 2%, while average revenue per unit (ARPU) plunged 9% during the quarter. A decline in fuel surcharge revenue also impacted the overall sales for Norfolk Southern. The company’s adjusted operating ratio stood at 69.1% in Q3 versus 62.0% in the prior-year quarter. Lower revenues and a rise in operating ratio resulted in a 35% decline in adjusted earnings, which stood at $2.65 per share in Q3.
Looking forward, the company should see increased fuel surcharge revenue in Q4 with a rebound in oil prices in recent weeks. However, volume growth may remain tepid in the near term. Although at current levels of $195, NSC stock is trading at 3.5x revenues versus its last five-year average of 4.8x, higher costs, lower shipment volume, declining ARPU, and the impact of a potential recession on its business are key risk factors that could cap the growth of NSC stock in the near term.
While NSC stock’s growth may be capped in the near term, in our view, 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.
|S&P 500 Return||4%||14%||95%|
|Trefis Reinforced Value Portfolio||4%||22%||525%|
 Month-to-date and year-to-date as of 11/7/2023
 Cumulative total returns since the end of 2016