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On Wednesday, October 3, analysts at Bernstein upgraded shares of Norfolk Southern Corp. (NSC). The firm raised its rating on the stock from an Underperform to a Market Perform and did not set a price target. As a result of the upgrade, shares of NSC started the day quite nicely trading up as much as 1.31%. That said I wanted to examine the company a bit further and take a look at how it compares to some of its industry-based peers in terms of several fundamental categories. The three companies within the Railroad sector I chose to compare with Norfolk Southern are: Canadian National Railway Company (CNI), CSX Corp. (CSX) and Union Pacific Corp. (UNP).

Overview: Norfolk Southern Corp.

"Norfolk Southern Corporation, through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. As of December 31, 2011, the company operated approximately 20,000 route miles in 22 states and the District of Columbia. Norfolk Southern Corporation was founded in 1883 and is based in Norfolk, Virginia. "(Profile: Yahoo Finance).

Margin Comparisons

As a whole, I've found that the railroad sector has one of the steadiest ranges of profit margins when compared to some of the other industries I've written articles on. That said the average profit margin of the four companies featured is a pretty decent 19.78%. In the last 12 months Norfolk Southern Corp. has managed to demonstrate a profit margin of 17.34%, whereas direct competitors CSX Corp., Union Pacific, and Canadian National Railway have demonstrated profit margins of 15.83%, 18.17%, and 27.76%, respectively. If we examine those numbers a bit closer we'll notice that Norfolk Southern only manages to outpace CSX Corp. by a ratio of 1.09 to 1 whereas Union Pacific outpaces Norfolk Southern by a very slight ratio of 1.04 to 1 and Canadian National Railway outpaces Norfolk Southern by a very wide ratio of 1.60 to 1.

When we examine margins as a whole we need to do it in two parts, and with that said I wanted to comparatively examine the operating margins of the four companies featured in this article. That said the average operating margin of the four companies featured is a pretty admirable 32.06%. In the last 12 months Norfolk Southern Corp. has managed to demonstrate an operating margin of 30.03%, whereas direct competitors CSX Corp., Union Pacific, and Canadian National Railway have demonstrated profit margins of 29.58%, 31.30%, and 37.14%, respectively. If we examine those numbers a bit closer we'll notice that once again Norfolk Southern only manages to outpace CSX, and does so by a very slight ratio of 1.01 to 1. On the other hand, both Union Pacific and Canadian National Railway outpace Norfolk Southern by ratios of 1.03 to 1 and 1.23 to 1, respectively.

Would I consider a position in Norfolk Southern based on the company's recent margin comparisons, in the wake of Bernstein's upgrade? Although the company's profit and operating margins are solid, Norfolk Southern only manages to rank third among the four companies featured. As the result of such a ranking, I'd want to examine several other fundamentals before making an investment decision.

Yield Comparisons

According to Investopedia the term dividend is defined as "a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders" and the yield is the percentage of current share that the dividend currently accounts for in real-time. With that said I wanted to highlight the dividend yield comparisons of Norfolk Southern and the other three companies I've mentioned in this article.

The average annual yield of the four companies featured is a very nice 2.375%. Investors should note that Norfolk Southern currently leads the pack with a yield of 3.10% ($2.00) whereas CSX Corp. (which currently yields 2.70% ($0.56)), Union Pacific (which currently yields 2.00% ($2.40)), and Canadian National Railway (which currently yields 1.70% ($1.51)) all bring up the rear. If we break down the comparative ratios we'll notice Norfolk Southern outpaces CSX Corp by a ratio of 1.14 to 1, Union Pacific by a ratio of 1.55 to 1, and Canadian National Railway by a ratio of 1.82 to 1.

Do the current comparative yield ratios strengthen the case to consider a position in Norfolk Southern, even though the company's margins need improvement? Yes and that is simply because the company's dividend has actually become more and more attractive over the last 30 months. Since May 2010, Norfolk Southern has increased its dividend five times, increasing it a total of $0.16/share or nearly 50%. As an income driven investor such things as continued dividend increases signal positive growth moving and strengthen the case for the possible establishment of a position in the company.

The remaining three companies also demonstrated changes in each of their respected dividend distributions over the last 30 months. Union Pacific and CSX have both increased dividend payouts three times in that period, whereas Canadian National Railway has flip-flopped each quarter since June 2010 raising its dividend 4 times and lowering its dividend 5 times.

Earnings Performance Over the Last 12 Months

Now that the proverbial scorecard is tied among the previously mentioned fundamental comparisons, there is one final comparison to examine, and that is the average percentage by which all four of these companies have surpassed analysts' estimates over the last 12 months. Over the last four quarters Norfolk Southern has surpassed analysts' estimates by an average of 7.15%, whereas Union Pacific has only surpassed estimates by an average of 6.98%, Canadian National Railway has only surpassed estimates by an average of 6.53% and CSX has struggled to only surpass estimates by an average of 3.80%. The numbers themselves make a very strong case for Norfolk Southern in terms of earnings performance as the company outpaces all three of its industry peers by strong comparative ratios. It should be noted that Norfolk Southern outpaces Union Pacific by a ratio of 1.02 to 1, Canadian National Railway by a ratio of 1.09 to 1, and CSX by a ratio of 1.88 to 1.

Final Analysis

Are there any negative catalysts ahead for potential investors of Norfolk Southern? There are a few factors to keep in mind before establishing a position in NSC. First and foremost, potential investors need to understand "Norfolk Southern railways serve every major container port in the eastern United States," and if shipping volume both domestically and internationally experiences a decline over the next 12-24 months, the stock could experience a significant sell-off. The second potentially negative catalyst to consider comes from my fellow SA colleague, Valuentum, which noted something interesting after NSG had announced earnings may not be strong as expected: "The major reason for the decline appears to be reduced coal shipments, where volume will fall 13%, leading to overall volume declines of 2%. CFO John Rathbone considers the U.S. grain market as another contributor to weakness."

Should potential investors consider a position in Norfolk Southern based on the three fundamental comparisons I've presented in the wake of Bernstein's upgrade? Yes. Based the comparative analysis I've presented, which demonstrates that fact that although NSC's margins need room for improvement, the company sets itself apart from its peers in terms of both earnings performance and dividend increases over the past 12 months. I'd consider a small to medium position at current levels and add to that position as both dividend and earnings dates approach.

Source: 3 Fundamental Comparisons To Consider Before Establishing A Position In Norfolk Southern