This Train is Going Strong
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Railway stocks have been lagging the markets lately; investors are quite concerned about the effects of low natural gas prices on this industry. Although macroeconomic variables like natural gas prices and demand for coal have a real impact on these companies, there could be a long term buying opportunity in some railroads which are reporting excellent financial numbers and trading at discounted valuations.
Low natural gas prices are a considerable problem for railroads; many of them have big exposure to coal transport and low prices for natural gas are hurting coal demand. Utilities are demanding less coal due to cheaper natural gas and a mild winter, and rail companies are feeling the impact. Norfolk Southern (NYSE: NSC), for example, saw a 6.1% decrease in coal shipping for the last quarter.
But you shouldn´t feel so bad for Norfolk shareholders, the company reported a great quarter on Wednesday, results were better than expected and the stock was jumping more than 3% after the announcement.
From the company´s press release:
- Railway operating revenues increased 6 percent to $2.8 billion.
- Income from railway operations improved 24 percent to $745 million.
- Net income increased 26 percent to $410 million.
- Diluted earnings per share rose 37 percent to $1.23.
Other sectors carried the weight of lost revenue from coal, and some extra weight for growth too:
Railway operating revenues improved 6 percent to $2.8 billion, primarily as the result of a 5 percent increase in revenue per unit; general merchandise revenues improved 13 percent to $1.5 billion; coal revenues declined 6 percent to $766 million; and intermodal revenues improved 9 percent to $527 million.
It looks like Norfolk is transitioning current low natural gas prices quite efficiently, and the stock is cheap in comparison to its history and in relationship to peers. Norfolk trades at a P/E ratio of 13.3, and its five year historical average is a bit above that at 14.4. Investors should also keep in mind the last five year period includes an extremely deep global economic recession, so valuations weren´t precisely happy for cyclical companies like Norfolk.
In the following table we compare different valuation ratios for Norfolk, Union Pacific (NYSE: UNP), Canadian National (NYSE: CNI), CSX (NYSE: CSX) and Canadian Pacific (NYSE: CP). And the results look quite good for Norfolk.
Norfolk Southern has a P/E ratio similar to the ratios of its competitors, but once we include PEG – P/E ratio adjusted for growth – Norfolk comes ahead of the group with the lowest PEG ratio at less than 0.9.
All the rest of the railways have a higher PEG ratio above 1, and If we look at Price to Book ratios or dividend yields, the conclusion is pretty much the same: Norfolk looks like the cheapest stock in the group.
Speaking about dividends, Norfolk has something to offer in that area too: the stock pays a 2.7% in dividend yield, the company has increased dividends in each of the last 11 years and it has the financial strength to keep increasing dividends regularly for a long time.
Norfolk Southern is facing macroeconomic headwinds via historically low natural gas prices, but the company is performing strongly and it looks undervalued from several points of view. Maybe it´s time to jump on this train.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Canadian National Railway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.