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Brace Yourself for What Analysts Estimate for Norfolk Southern

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Nov. 20 2020, Updated 2:45 p.m. ET

Analyst recommendations for Norfolk Southern

Previously in this series, we went through the debt maturities of Norfolk Southern Corporation (NSC) and its ability to support these debt levels. In this part, we’ll look into analyst ratings for the company and its peers. Currently, the majority of analysts recommend a “hold” for Norfolk Southern’s stock. Of the analysts covering Norfolk Southern, six analysts have issued a “buy” recommendation, 18 have “hold” recommendations, and two have “sell” recommendations for NSC’s stock.

The average target price for NSC is $89.25 compared with its current market price of $78.00, representing a potential return of 14.4%. Norfolk Southern constitutes 0.61% of the Vanguard Dividend Appreciation (VIG).

Compared with Norfolk Southern, the major Canada-based railroads operating in the United States including Canadian Pacific Railway (CP) and Canadian National Railway (CNI) along with Norfolk Southern’s prime competitor, CSX Corporation (CSX), have no “sell” recommendations.

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Changes in analyst recommendations

In December, however, after Canadian Pacific’s offer of acquisition and Norfolk’s disclosure of its plan for the next five years, many analysts revised their price targets with no change in recommendations. Goldman Sachs revised its 12-month price target from $85 to $81 in January 2016.

Many downward revisions of target prices seem due to greater-than-anticipated falls in the traditional coal business coupled with relatively less stable intermodal revenues going ahead. The company’s 2016 intermodal revenues are likely to be impacted due to the restructuring of Triple Crown Services subsidiary. Commodity demand headwinds seem to affect the general merchandise revenues going forward with a potential impact on earnings.

Prospects of further downside for Norfolk Southern?

Analysts are forecasting consensus revenues of $10.6 billion for 2015 and $10.5 billion for 2016. Norfolk Southern reported revenues for 2014 were $11.6 billion. The company’s 2015 revenue decline is contributed to coal’s downward journey and commodity headwinds affecting general merchandise segment. The consensus EBITDA (earnings before interest, tax, depreciation and amortization) for the next four quarters is predicted to reach $4.2 billion, representing a margin of ~40%, up from ~38% in 2015. Improved pricing ahead coupled with its focus on lowering operating cost could boost the company’s EBITDA margins.

Norfolk Southern appears to be more concentrating on cost. The market has factored in the anticipated fall in coal shipments, however, and shipments of intermodal could play a significant role in driving the earnings and price ahead. Management’s ability to extract more business from existing customers through solid pricing going ahead could also be a catalyst for the company’s stock. If the management’s five-year plan goes well, then we can likely expect more share buybacks and aggressive cost-cutting measures to positively affect the company’s earnings over next year.

For more analysis, check out Market Realist’s Transportation page.

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