How Norfolk Southern Looks to Analysts after Its Q3 Results

Analysts’ recommendations

Let’s turn to analysts polled by Thomson Reuters for their recommendations on Norfolk Southern (NSC) in the wake of its third-quarter results. As of October 28, the railroad company (XTN) is being covered by 26 analysts and has a consensus rating of 2.35, indicating a “buy.”

Five analysts (or 19.2%) have “strong buy” recommendations on NSC stock, whereas eight (or 30.8%) have “buy” recommendations on the stock. A total of 12 analysts (or 46.2%) recommend “holds” on NSC stock, and one (or 3.8%) has a “sell” recommendation on the stock.

How Norfolk Southern Looks to Analysts after Its Q3 Results

Peers’ ratings

Norfolk Southern’s rival CSX (CSX) has a consensus rating of 2.15, reflecting a “buy” recommendation and a target price of $81.57. Major Western US rail carrier Union Pacific (UNP) has mostly “buy” ratings and a target price of $166.38 from Reuters-surveyed analysts. Smallest Class I US railroad company Kansas City Southern (KSU) has a target price of $125.44 and a mean rating of 2.16, representing a “buy.”

Canadian National Railway (CNI), Canada’s largest freight rail company, has a consensus rating of 2.62, indicating a “hold” recommendation and a target price of 120.76 Canadian dollars. Canadian Pacific Railway (CP), its primary competitor, has a rating of 1.8, reflecting a “buy,” and a target price of 300.6 Canadian dollars. Genesee & Wyoming (GWR) has a “buy” rating and a target price of $88.5.

Why the “holds” on NSC?

As of October 28, 13 analysts have given NSC “buys” or “strong buys,” while 12 have given it “holds.” The company has made steady progress on its Plan 2020, which is focused on generating $650.0 million in operational efficiency gains. To inch closer to its objective, the company intends to implement a new operating plan called “clean sheeting.”

According to NSC, the clean sheeting process begins in the terminals and local serving yards, where cars tend to accumulate as they navigate the first or last miles of their trips. The objective is to increase fluidity by reducing car inventories, accomplished in part by increasing service frequency for customers. With the new plan in force, NSC should be able to further reduce its operating ratio going forward.

On the returns front, Norfolk Southern stock return stacks up well compared to its peers. The company’s free cash flow rose 35.5% year-over-year in the first nine months of 2018. NSC has also raised its quarterly cash dividend twice in 2018. NSC’s earnings should see a boost on stock buybacks in the coming quarters.