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Norfolk Southern (NSC) Banks On Volume Growth: Time To Buy?

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We have issued an updated research report on Norfolk Southern Corporation (NSC - Free Report) on Aug 31. Owing to multiple tailwinds, shares of the company have gained 43.5% in a year’s time compared with the industry’s rally of 32.8%.

 

Reasons for Robust Price Performance

Norfolk Southern has an impressive earnings history. The company beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 8.1%.

In July, this Norfolk, VA- based company posted better-than-expected earnings and revenues in second-quarter 2018 results. In the quarter, earnings per share (EPS) of $2.50 outpaced the consensus estimate of $2.31, courtesy of a low-effective tax rate. The bottom line improved 46% on a year-over-year basis. Railway operating revenues of $2898 million surpassed the consensus estimate of $2853.6 million and increased 10% year over year. Overall, volumes expanded 6%, primarily owing to impressive segmental growth.

Moreover, the company’s business is benefitting immensely from volume growth. Volumes have expanded 4% in the first half of the year on the back of impressive performances at its key divisions. In fact, Norfolk Southern anticipates volume growth to continue in the rest of 2018.

Further, we are impressed by the company’s constant efforts to streamline operations and reduce costs to increase productivity and drive the bottom line. The improvement in operating ratio is a positive. In the second quarter of 2018, the metric has improved 170 basis points on a year-over-year basis. The company also aims to achieve an operating ratio of below 65% by 2020 or earlier.

Additionally, Norfolk Southern’s focus on rewarding shareholders in the form of share repurchases and dividends is a huge positive. The company rewarded shareholders to the tune of $1.1 billion during the first half of the year through dividends ($408 million) and buybacks ($700 million). In July 2018, the company hiked quarterly dividend by 11% to 80 cents. This is the second dividend hike by the company in 2018. In the first quarter, the company hiked dividend by 18% to 72 cents. Combining the latest hike, the company has increased dividend by 29% this year so far. The hikes underline strong financial condition and bright prospects. Past records reflect on the company’s stable dividend payment policy.

Bullish Readings & Zacks Rank

The optimism around the stock can be gauged from the Zacks Consensus Estimate being revised 8.5% upward in the last 60 days for current-quarter earnings.

The company’s impressive Momentum Score of B further highlights short-term attractiveness.

In the light of these positives, we believe that Norfolk Southern should be bought by investors for now. The Zacks Rank #2 (Buy) carried by the stock seems to suggest the same.

Stocks to Consider

A few better-ranked stocks in the broader Transportation Sector are C.H. Robinson Worldwide, Inc. (CHRW - Free Report) , Old Dominion Freight Line, Inc. (ODFL - Free Report) and SkyWest, Inc. (SKYW - Free Report) . While C.H. Robinson carries a Zacks Rank #2, Old Dominion and SkyWest sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of C.H. Robinson, Old Dominion and SkyWest have gained 7%, 10.2% and 17.8% in the past six months, respectively.

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