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How Is Norfolk Southern Valued against Its Peers?

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Dec. 4 2020, Updated 10:53 a.m. ET

Norfolk’s dividend distributions

From 2006 through September 2015, NSC incurred $17.1 billion in capital expenditure and distributed another $14.6 billion in stock buybacks and dividends. NSC has consistently paid dividends since its inception, with its 12-month dividend yield being 42% higher than those of its peers, including Kansas City Southern, Canadian Pacific, and Canadian National Railway.

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Forward PE (price-to-earnings) multiple 

NSC’s next-12-month PE (price-to-earnings) multiple is valued at 15.2x against the peer average of 14.8x. This indicates a premium of 3%.

The market has reacted negatively to Norfolk’s response to Canadian Pacific’s original and revised acquisition offers. This has taken some value out of NSC’s stock, impacting its trailing-12-month and forward PE multiples to some extent.

A larger-than-expected fall in the traditional coal business has hit NSC’s earnings and impacted its EPS (earnings per share) since 2012. This has contributed to NSC’s lower PE ratio. NSC implemented coal business rationalization measures in 2015.

In contrast, a steady rise in NSC’s intermodal and general merchandise businesses have resulted in revenue and earnings growth over the last four years. This supported NSC’s PE multiple. The gap between NSC’s trailing-12 months and its next 12-months is substantially smaller than before.

  • NSC’s five-year historical average PE is 12.4x
  • Its lowest five-year historical PE multiple is 10.9x
  • Its highest five-year historical PE multiple is 16.0x

Headwinds

Sustained weakness in coal coupled with slack in the commodity markets and the increase in short-term truck capacity are possible headwinds for Norfolk. Fuel surcharge revenues negatively weighing over a fall in fuel expenses have the ability to impact NSC’s stock going forward.

However, environmental factors related to MATS (Mercury and Air Toxic Standards) for coal-fired power plants have already been priced into railroad stocks. Lower crude benefiting the trucking industry, which competes with NSC’s intermodal business, may impact the company’s stock price.

However, these factors will also impact other railroads. All of these factors can put pressure on Norfolk’s stock price as well as investor sentiments in 2016.

Tailwinds

Norfolk expects growth in its intermodal business resulting from the restructuring of its Triple Crown Services subsidiary in 2016. Tightening of truck capacity, improvements in network reach, and growth in housing, construction-related commodities, basic chemicals, and ethanol will boost the railroad’s business confidence index.

Enhanced capacity utilization by shippers coupled with fewer levels of inventory have the potential to revive the freight business. Market-driven events will also impact peers such as CSX (CSX), Kansas City Southern (KSU), Union Pacific (UNP), Canadian National Railway (CNI), and Canadian Pacific (CP).

Investors looking for indirect exposure in US railroads can invest in the Industrial Select Sector SPDR ETF (XLI), which holds 7.8% in the group and 1.7% in NSC.

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