Norfolk Southern Is A Ride Worth Taking (NSC)

Apr.19.06 | About: Norfolk Southern (NSC)

Norfolk Southern Corporation (NYSE:NSC), through its subsidiaries, engages in the rail transportation business in the United States and parts of Canada. The company transports raw materials, intermediate products, and finished goods, as well as overseas freight through various Atlantic and Gulf Coast ports. (Y! Finance)

Catalysts that rank NSC a buy:

  • Railcars are in great demand for carrying everything from coal to sea containers, and rail rates are the highest they've been in decades. Orders began to improve in late 2003 as the U.S. economy and global trade picked up steam, resulting in volume growth in 2004, 2005 & look to continue in 2006.
  • Norfolk runs trains over 22,000 route miles in 22 states, mostly east of the Mississippi. Its fastest growing segment is the intermodal business, which transfers products from ships and trucks. Intermodal volume is growing in double digits.
  • With gas prices high, trucking firms look to save money by using railroads to transfer loads for long distancesNorfolk's biggest spike in volume has come from the Port of Norfolk, Va., near the company's home base. The Norfolk port is expanding to handle an influx of new business.
  • Starting in 2001, Norfolk began a major overhaul of its operations to make trains run more efficiently and at a lower cost. Since then, the company says, volume has grown at nearly twice the rate of other U.S. railroads. A second phase of the efficiency program kicked in last August.
  • Coal accounts for 24% of overall company sales. Intermodal generates 21%. UBS forecasts that Norfolk's coal shipments will increase 5% this year. To fuel power plants, utilities have been buying more coal as an alternative to high-priced natural gas. Morgan Stanley analyst James Valentine wrote that Norfolk had the best pricing in the industry last year. Analysts expect strong pricing trends to continue this year.
  • Competitive analysis: NSC has the best gross & pre-tax margins in its industry, 66.12 & 19.9 vs Industry, 39% & 14%. NSC's PEG 1.08 vs Industry's 1.26. Its operating, gross & pre-tax margins outpace its most formidable competitors; UNP, BNI & CNX.
  • Analysts polled by First Call estimate Norfolk's earnings will grow 17% to $3.31 a share this year, then increase 15% to $3.81 a share in 2007.
  • Risks:

  • Unfavorable fuel prices
  • Weaker than expected economic & freight demand growth
  • A sharper than expected rise in interest rates.
  • I would add a little position here & wait for a pullback, as NSC has run up quite a bit. In any case this is one rail ride I wouldn't want to miss.

    NSC 1-yr Chart

    Disclosure: I do not own any shares in NSC, UNP, BNI & CNX

    ** Part of the analysis has been excerpted from IBD