Rails of Recovery

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the economy of a country is recovering, its domestic logistics network recovers along. In the US, railroads provide an important means of transportation of raw materials for various industries. From the attached chart, we can very well see that the industrial production of the US has risen nearly 13% over the last 3 years. Over the same period, shares of Norfolk Southern Corp (NYSE: NSC) have risen by more than 55%. Here are a few reasons why we think Norfolk Southern would make a great investment choice.


<img src="http://media.ycharts.com/charts/4f44b5e57430b37a4adcc7fa2b4cffb4.png" />

US Industrial Production Index data by YCharts

Norfolk Southern Corporation is a Virginia based holding company which fully owns Norfolk Southern Railway. The company involves truck, railroad and ocean transportation of raw materials, finished goods and intermediate goods, and operates over 20,000 route miles of railroads in 22 Eastern States.

The company’s core business remains railroad transportation, which is considered to be the safest and most cost efficient mode of freight transportation. The housing sector is finally recovering, and new constructions are on the rise, which require construction supplies. Additionally the boom in the auto industry and the increasing demand for lumber has increased the need for railroad transportation. 

In a bid to cut operating costs, the management of the company announced that it would be introducing a new fleet of locomotives, which would be more fuel efficient, and hence would add to the profit margins of the company. In the recent financial results, the company reported EPS of $1.60 which was 3% higher compared to the year ago quarter, and 5.2% higher than the Street’s estimates. The net income of the NSC increased 28%, thanks to the 20% increase in net income of Norfolk Southern Railways.

The company has a healthy trailing dividend yield of 3.01% and to add to shareholder’s pockets, management hiked dividend payouts by 6.4%. The company has been consistently paying out dividend since the last 120 quarters. Management also announced its $7.1 billion share repurchase program under which 175 million share would be repurchased by the end of 2017. Share repurchase programs are interesting as they indicate the amount of faith the board members have in the company’s future.

Norfolk Southern shares its market space with CSX Corp (NYSE: CSX), Union Pacific Corporation (NYSE: UNP) and Canadian Pacific Railway Limited (NYSE: CP).


<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>P/E</p> </td> <td> <p>PEG</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Net Profit Margin</p> </td> </tr> <tr> <td> <p>Norfolk Southern</p> </td> <td> <p>11.41x</p> </td> <td> <p>0.83x</p> </td> <td> <p>82%</p> </td> <td> <p>17.35%</p> </td> </tr> <tr> <td> <p>CSX Corp</p> </td> <td> <p>11.93x</p> </td> <td> <p>1.34x</p> </td> <td> <p>102%</p> </td> <td> <p>15.83%</p> </td> </tr> <tr> <td> <p>Union Pacific</p> </td> <td> <p>15.65x</p> </td> <td> <p>1.12x</p> </td> <td> <p>49%</p> </td> <td> <p>18.17%</p> </td> </tr> <tr> <td> <p>Canadian Pacific</p> </td> <td> <p>22.57x</p> </td> <td> <p>2.12x</p> </td> <td> <p>97%</p> </td> <td> <p>11.9%</p> </td> </tr> </tbody> </table>

Amongst the peers, Norfolk Southern has the second highest net profit margin and the second lowest debt to equity levels. The financial metrics also indicate that Norfolk is the most undervalued company amongst its peers.

We believe that with the economic recovery, railroad transportation would increase. Norfolk Southern reported good financial results and has good financial metrics. The company is currently witnessing a fall in freight transportation volume, thanks to the fall in coal demand. Management expects a kick up in volume, and it is due to this reason, the margins have not been compromised. The company has a history of stable dividend payouts and it is due to these reasons Norfolk Southern has a Foolish Buy rating.

PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus