Norfolk Looks Undervalued
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Norfolk Southern (NYSE: NSC) have underperformed the markets in 2012 due to investors’ concerns about the effects cheap natural gas could have on the railroad industry. This short term volatility could be an opportunity for long term investors looking for companies with solid fundamentals and attractive valuations.
The fact that many railroad stocks have been underperforming the market is probably related to the threat of falling natural gas prices. The US has found some tremendous gas reserves lately and it seems like natural gas prices just can´t stop falling. One has the right to wonder about the possible effects this situation could have on different industries.
Trains and trucks are direct competitors in many products in the transport business. If trucks start switching to natural gas they could gain some ground in term of terms of costs, and that is a genuine concern for investors in railroads.
However, it doesn’t look like they will become the low cost alternative anytime soon; trains will probably remain cheaper than trucks in the long-run.
Also, companies like Norfolk make a big part of their business from coal transport, and coal is a global business in which China is the dominant player. Oil prices have remained quite high in the last months, and that could have bullish implications for coal prices too.
Norfolk Southern looks solid enough to keep delivering a strong financial performance and rewarding its investors with rising dividends over the long term. The company reported a 17% increase in sales for the last quarter, and earnings per share were up by a 31.6%. Norfolk also increased its dividends by a 9% last quarter.
Norfolk looks cheap in comparison to other big railroads like Union Pacific (NYSE: UNP), Canadian National Railway (NYSE: CNI) and CSX (NYSE: CSX). The company is the only one in the group that has a PEG ratio bellow 1 with 0.8 in that metric. Dividend yield is the highest one for Norfolk at a 2.7% and the company has the second lowest forward P/E ratio at 10.5.
|
Ticker |
Market Cap |
Fwd P/E |
PEG |
Dividend |
|
UNP |
53.87B |
12.08 |
1.06 |
2.14% |
|
CNI |
34.00B |
12.91 |
1.05 |
1.94% |
|
NSC |
22.97B |
10.48 |
0.81 |
2.70% |
|
CSX |
22.64B |
10.10 |
1.10 |
2.23% |
Norfolk is a solid old school business with strong fundamentals trading at convenient valuations, regardless of natural gas prices.
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