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Growth & Income

Norfolk Southern Corp. (NSC - Analyst Report) delivered positive earnings surprises in four out of the last five quarters, outpacing the Zacks Consensus Estimate by an average of 6.7%. Despite facing a steep decline in coal shipments, this class 1 freight railroad operator has maintained profitability thanks to strong operating efficiency and cost control measures.

Moreover, Norfolk Southern currently offers an attractive dividend yield of 2.72%. With a long-term growth potential of 12.3%, this Zacks #2 Rank (Buy) offers solid growth potential backed by increased service abilities and heavy investment in key projects, which lead to cost reduction and higher productivity.

A Mixed Quarter

On July 24, Norfolk Southern reported mixed financial results for the second-quarter 2012. Earnings per share of $1.60 surpassed the Zacks Consensus Estimate by 7 cents or 4.6% and beat the year-ago earnings by 22 cents or 15.9%. Operating revenue of $2,874 million increased 0.3% year over year but fell short of the Zacks Consensus Estimate by 2.1%.

On a year-over-year basis, Coal revenues decreased 15.5% while General Merchandise and Intermodal revenues grew 8.6% and 4.3%, respectively. Operating income rose 6.7% year over year to $934 million. Fuel expenses dropped 5.3%. Operating ratio (a key metrics for the transportation sector) improved 2% to a record high of 67.5%.

Earnings Estimates Climb

In the last 30 days, fourteen out of 25 estimates for 2012 moved higher, lifting the Zacks Consensus Estimate by 1% to $5.98. This implies year-over-year profit improvement of 14.1%. Norfolk Southern also witnessed 10 of 25 estimates move higher for 2013, lifting the Zacks Consensus Estimate by approximately 0.5% to $6.64. This suggests year-over-year growth of 11.1%.

Solid Dividend Yield

Norfolk Southern has been paying dividends for 120 consecutive quarters. On August 1, management raised its dividend rate by 6.4%. Currently, the company offers a lucrative dividend yield of 2.72%, significantly higher than the industry average of 1.93% and the company’s 5-year average yield of 2.40%.

Attractive Valuation

Norfolk Southern currently looks attractive with respect to several valuation metrics. The stock’s forward P/E of 12.31x indicates a huge discount of 32.3% from the peer group average of 16.28x. Similarly, the stock’s current P/B of 2.45x is at a 14.3% discount to the peer group average of 2.80x and its current P/S of 2.11x is also at a discount of 30.8x to the peer group average of 2.76x. Norfolk Southern looks quite attractive given its trailing 12-month ROE of 19.7x, which is 18.7% higher than the peer group average of 16.6%.

Strong Chart

The chart below shows a secular positive price movement since June 2012, barring some minor pullbacks. The stock has been consistently trading above its 50 and 200-day moving averages since June 25, 2012. Average volume also remains quite impressive at 1,860K. The widening gap between the stock price line and that of the 50 and 200-day moving average lines show the potential future growth of Norfolk Southern.

Norfolk Southern is poised to benefit from strong pricing momentum on the back of growing demand for rail transportation. Pricing improvement coupled with productivity gains will offset cost inflation. A booming railroad industry, solid long-term growth potential and a lucrative dividend yield make Norfolk Southern an attractive pick for growth & income investors.

Headquartered in Norfolk, Virginia, Norfolk Southern Corp. was founded in 1883. Currently, the company operates approximately 20,000 route miles of rail track in 22 states (predominantly in the eastern part of the U.S.) and the District of Columbia. The company is primarily engaged in the rail transportation of raw material, intermediate products and finished goods. It also offers logistic services.

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