Norfolk Southern Corporation (NYSE:NSC) is a railroad company that ships coal, raw materials, and finished products throughout the eastern parts of the United States. The Norfolk, Virginia based company has a market cap of $26.2 billion, and its stock price is around $91.
How is Norfolk Southern Doing?
In recent years, Norfolk Southern's business has seen steady earnings growth along with bullish stock performance. The company is currently in an excellent position to continue benefiting from changes in the shipping business.
Norfolk Southern reported its fourth quarter and annual earnings on January 22. Fourth quarter revenues were $2.9 billion up 7% from revenues of $2.7 billion in 2012. The railroad's net income was $513 million or $1.64 per share up 26% from $1.30 a year ago and easily surpassing Zacks consensus analyst estimates of $1.50 per share. The company's full year earnings were also impressive, with revenues of $11.24 billion up 9% and net income of $6.04 per share up 12.5% from last year and again surpassing analyst estimates of $5.72 per share. The company ended the year with $1.4 billion in cash and cash equivalents up from $653 million at the end of 2012. Further, during the earnings call, the company announced that it increased its dividend to $0.54 up from $0.52, and repurchased 8.3 million shares of common stock for $627 million during 2013.
The future Looks Good for Norfolk Southern
With the exception of coal shipments, Norfolk Southern increased revenues and volumes in each of its primary shipping sectors on a year-over-year basis. The company's best performing sector was its merchandising group which had a 12.5% increase in revenues to $179 million and an 8% increase in volume. The company's metal and construction sector realized a 1% increase in volume. The agricultural sector realized a 6% increase in volume. The chemical market sector increased volume by 22%.
In the railroads other business sectors volumes were also higher, automobile shipping volumes were up 10%, and lumber shipping volumes were up 16%.
The company's biggest challenge was in its coal shipping segment where its revenues were down 2% to $641 million on 8% less volume. Donald W. Seale the company's Chief Marketing Officer, projected that in 2014 the coal business will remain sluggish.
Norfolk Southern Moving into the Future
For years Norfolk Southern and the other large railroad companies have been able to depend on rising revenues from their coal shipping business. Unfortunately recent restrictive environmental requirements, and competition from other low cost sources of energy like natural gas are likely to continue to decrease the demand for coal. However, Norfolk Southern along with its primary competitors Union Pacific Corporation (NYSE:UNP) and CSX Corporation (NYSE:CSX) have done a good job of increasing revenues in business segments other than coal.
Norfolk Southern's merchandise shipments have grown rapidly and now account for 56% of the company's revenues. Another example Norfolk Southern's ability to make adjustments to meet customer needs is the oil and gas sector. In recent quarters the company has successfully handled dramatic increases in shipments of frack sand, oil, and natural gas liquids. This ability to adjust the business to meet customer needs is great news for the railroad and its investors, because as coal shipments weaken, shipments that are connected to the fast growing U. S. business of producing oil and natural gas will almost certainly increase.
Norfolk Southern Stock Analysis
The stock prices of the three big U. S. railroad companies have been on a five year bull run. The bull-run for these stocks began largely because gasoline and diesel prices rose so high, that it became cheaper to make large and medium sized freight shipments by train. That change in the shipping business resulted in higher shipping volumes and better pricing power for all of the large railroads. The railroad giants quickly adjusted to their new found advantages and began to make head turning profits which in turn caught the eye of smart investors. Over the last five years, the price of Norfolk's Southern's stock has gone up by over 280% while the stock price of Union Pacific has gone up by over 290% and the stock price of CSX has increased by around 310%. Despite the strong run up in the stock price of the big three railroad companies their multiples are still relatively cheap. Norfolk Southern's price to earnings ratio is 15.3, and its price to book ratio is 2.5. That compares to Union Pacific's which has a PE ratio of 18.5 and a PB ratio of 3.8 and CSX whose PE ratio is 14.6 and whose PB ratio is 2.5.
Another factor that is working in favor of the railroads is the steadily improving economy. There seems a general agreement that the economy is improving. The railroads are often times indicators of the strength of the economy, and with improvements in shipments of automobiles, housing and construction equipment and manufacturing products it appears that the economy has made a turn for the better. Union Pacific's Chairman and CEO Charles W. Moorman said it "certainly seems like the economy may be improving at a somewhat faster pace than we saw in 2013."
The large railroad companies have done an excellent job of reducing their dependence on dwindling coal revenues, and moving into the faster growing merchandise and now booming oil and gas businesses.
Norfolk Southern's ability to make adjustments has allowed it to continue growing earnings, and that is why its stock price is still on the rise (Norfolk Southern's is up 34% in the last year). With an improving economy and with new areas of business rapidly opening up, the future of the company looks bright. The stock of Norfolk Southern should continue to perform well and reach a price of $105.00.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.