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Why Most Analysts Have a ‘Hold’ View of Norfolk Southern

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Analysts’ recommendations

Norfolk Southern (NSC) has a consensus rating of ~2.6, reflecting a “hold.” The company is tracked by 26 analysts. Of these analysts, four (15.4%) recommend a “strong buy” on NSC to investors. 

Five analysts (19.2%) have “buy” advice, and 14 analysts (53.8%) suggest a “hold” on NSC stock. Three analysts (11.5%) have a “sell” opinion on NSC stock.

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Analysts’ price targets

Norfolk Southern (NSC) stock has a consensus 12-month target price of $153.27. Its stock closed at $154.05 on January 17, 2018. We’ll look into analysts’ estimates of NSC’s peer group target prices and return potential below:

  • CSX (CSX) has a 12-month target price of $62.26 with a return potential of 7.1%.
  • Union Pacific (UNP) has a 12-month target price of $142.50 with a return potential of 1.5%.
  • Kansas City Southern (KSU) has a 12-month target price of $117.75 with a return potential of 6.3%.
  • Canadian National Railway (CNI) has a 12-month target price of $240.97 Canadian.
  • Canadian Pacific Railway (CP) has a 12-month target price of $238.23 Canadian.
  • Genesee & Wyoming (GWR) has a 12-month target price of $88.58 with a return potential of 8.8%.

Why a “hold” on Norfolk Southern?

If we look at the US manufacturing sector index, the ISM (Institute of Supply Management) has a positive story to tell. The December 2017 Purchasing Managers’ Index was 59.7, up from 58.2 in November 2017. 

Major indexes tracked by ISM have been trending on the higher side. More notable are the new orders, production, employment, and supplier deliveries, which are growing quickly. 

These sentiments are good for Norfolk Southern. However, we should also remember that its top-line growth depends on what CSX does to regain its lost customers.

Analysts have a mixed opinion on Norfolk Southern. Loop Capital analyst Rick Paterson lowered his rating from “hold” to “sell,” citing high valuation concerns. Although its operating margins have improved, NSC has yet to demonstrate a strong gain in margins. The recent hurricanes and increased track maintenance work may act as a headwind for its operating margins.

The US tax reform benefits should play a vital role in railroads’ (IYJ) stock prices going forward. Wolf Research expects railroads to perform better in 2018 and offered an “outperform” opinion on NSC. Scotiabank upgraded Norfolk Southern from a “sector perform” rating to “sector outperform” rating.

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