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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Norfolk Southern Corporation (NYSE:NSC) fares in the ModernGraham valuation model.

NSC Chart

NSC data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $93.99
MG Value $122.00
MG Opinion Fairly Valued
Value Based on 3% Growth $76.75
Value Based on 0% Growth $44.99
Market Implied Growth Rate 4.63%
NCAV -$58.66
PEmg 17.76
Current Ratio 1.33
PB Ratio 2.57

Balance Sheet - 12/31/2013

Current Assets $3,075,000,000
Current Liabilities $2,305,000,000
Total Debt $8,903,000,000
Total Assets $32,483,000,000
Intangible Assets $0
Total Liabilities $21,194,000,000
Outstanding Shares 308,880,000

Earnings Per Share

2013 $6.05
2012 $5.38
2011 $5.55
2010 $4.08
2009 $2.82
2008 $4.52
2007 $3.68
2006 $3.57
2005 $3.11
2004 $2.31
2003 $1.05
2002 $1.18

Earnings Per Share - ModernGraham

2013 $5.29
2012 $4.77
2011 $4.35
2010 $3.74
2009 $3.56
2008 $3.77

Dividend History

NSC Dividend Chart

NSC Dividend data by YCharts

Conclusion:

Norfolk Southern Corporation is suitable for the Defensive Investor, having passed every requirement of the investor type except for the current ratio requirement. The company is also suitable for the Enterprising Investor by default since it qualifies for Defensive Investors, despite having a higher level of debt relative to current assets than the Enterprising Investor typically likes to see. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should feel very comfortable proceeding with further research into the company. One example of further research may be to compare the company to a competitor such as through a review of ModernGraham's valuation of Union Pacific, or one could review a list of 5 Low PEmg Companies for the Defensive Investor. From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $3.56 in 2009 to $5.29 for 2013. This is a solid level of historically demonstrated growth that surpasses the market's current implied estimate for earnings growth of 4.63%, and the ModernGraham valuation model returns an estimate of intrinsic value that is greater than the market price, indicating the company may be undervalued presently.

Disclaimer: The author did not hold a position in Norfolk Southern Corporation or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Norfolk Southern