Norfolk Southern’s (NSC) network fluidity gauged by train speed and terminal dwell (time taken by freight cars to load and unload at terminals) fell in 2014. However, a slew of measures taken by NSC’s management, including reducing 300 track miles of coal network and shifting dedicated coal locomotives to higher growth network areas, have improved network fluidity by 2% in 2015.
These initiatives have helped to improve service levels and resource utilization rates in 2015. Norfolk expects to achieve improved results in 2016 by way of a better US economy and its focus on service returns and growth.
Out of a total 26 analysts, 23% or six analysts, are holding a “buy” opinion on Norfolk Southern. 69%, or 18 analysts, are recommending a “hold” on Norfolk, and a mere 7%, or two analysts, are advising investors to sell their shares of NSC.
Analysts forecast the company’s long-term EPS (earning per share) growth at 8%. This is better than NSC’s rival CSX (CSX), which has a forecast of 6.5% growth. In five out of the last eight quarters, Norfolk was able to beat its consensus adjusted EPS estimates. The 12-month consensus mean target price for NSC’s share is $90.25.
Though analysts have predicted negative revenue growth of 1.2% for 4Q15, this is expected to turn positive in 2016 after a few quarters of reduced growth. Analysts expect EBITDA (earnings before interest, tax, depreciation, and amortization) margins to grow from ~38% over the last four quarters to 40% in 2016.
Aided by improved operating margins, the company’s GAAP (generally accepted accounting principle) net income is expected to jump 8% in 2016. Even though its near-term revenue and earnings outlooks may not be encouraging, Norfolk expects a revival in 2016.
Investing in ETFs
Apart from CSX, NSC’s peer group includes Kansas City Southern (KSU), Union Pacific Railway (UNP), Canadian Pacific Railway (CP), and Canadian National Railway (CNI). Investors willing to take exposure to US Class I railroads can invest in the iShares U.S. Industrials ETF (IYJ), which holds 2.3% in the group.