Railroad On Track For The Long Haul

3/31/2014


  Recent Price
$97
  Dividend
$2.16
  Yield
2.2%
  P/E Ratio
16
  Shares (millions)
312
  Long-Term Debt as % of Capital
44%
  52-Week Price Range
$98.03 - $70.27

The Forecasts added Norfolk Southern ($97; NSC) to its Long-Term Buy List in the March 10 issue, giving us two railroads on the list at the same time, a hook-up that hasn't happened in at least a decade.

Why are we riding the rails more today than in the past? Our Quadrix stock-rating system explains part of it, as the railroads in our research universe average Overall scores of 68, powered by strong scores for Momentum (66) and Quality (80). But we also see a lot to like about the industry itself and Norfolk Southern in particular. Norfolk is expected to grow per-share profits 9% this year and 14% next year and trades at 16 times trailing earnings, a 22% discount to the average of the seven largest U.S. and Canadian railroads.

Looking ahead

Norfolk Southern stands to benefit from several long-term trends:

• The U.S. Census Bureau expects the country's population to rise by 100 million by 2050, while the Federal Railway Administration estimates that railroads ship 40 tons of annual freight per American. These projections equate to a 35% rise in rail traffic over the next 36 years.

• United Nations projections call global agriculture output to double by 2050 to meet the needs of a growing population. The U.S. exported $136 billion of food last year, and a rise over time would be good news for Norfolk Southern.

• Helped by a surge in shale drilling, U.S. oil production in the Rocky Mountain, Midwest, and East Coast regions more than doubled over the last five years. Existing pipelines can't handle the volume, and opposition to new pipelines has led many producers to ship petroleum by train. In 2013, crude-oil carloads rose 74% industrywide but still accounted for just 1.4% of shipments. Despite some high-profile accidents, energy-by-rail seems likely to be a growth driver in coming years. Last year, Norfolk Southern's chemical volumes rose 16%, with crude oil accounting for virtually all the growth.

What's happening

Like other railroads, Norfolk Southern has been hurt by a slowdown in coal shipments, which accounted for 18% of company volume last year versus 23% in 2011. The company has focused on growing its intermodal business, cargo also being transported by ship or truck. Intermodal shipments accounted for 49% of Norfolk Southern's total in 2013, up from 45% in 2011.

In February, Norfolk Southern raised its quarterly dividend 4% to $0.54 per share, the second boost in the last 12 months and the 13th consecutive annual increase. The stock's 2.2% yield is the highest among large U.S. and Canadian railroads.

Norfolk Southern operates 20,000 miles of track in 22 Eastern and Southern states, with routes into every major Eastern seaport, as well as 10 river ports and nine lake ports. The company is fairly dull, just an attractively valued, consistent grower operating in an industry poised for several decades of expansion. We'll take that kind of boring.

An annual report for Norfolk Southern Corp. is available at 3 Commercial Place, Norfolk, VA 23510, (757) 629-2680, www.nscorp.com.

NORFOLK SOUTHERN
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '13
1.64
vs.
1.30
7%
93.17
-
76.08
16 - 13
Sep '13
1.53
vs.
1.24
5%
78.91
-
71.51
15 - 13
Jun '13
1.46
vs.
1.60
-3%
81.00
-
70.27
15 - 13
Mar '13
1.41
vs.
1.23
-2%
77.42
-
62.65
14 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
11.25
6.04
2.04
93.17
-
62.65
15 - 10
2012
11.04
5.37
1.94
78.50
-
56.05
15 - 10
2011
11.17
5.45
1.66
78.40
-
57.57
14 - 11
2010
9.52
4.00
1.40
63.67
-
46.18
16 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
80
71
74
79
44
73

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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