Earnings Analysis: Norfolk Southern

| About: Norfolk Southern (NSC)

Norfolk Southern (NYSE:NSC) reports preliminary financial results for the quarter ended Sept. 30, 2012.

Norfolk Southern recently reported its preliminary financial results, which CapitalCube uses to provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Norfolk Southern's analysis vs. peers uses the following peer set: Union Pacific (NYSE:UNP), Canadian National Railway (NYSE:CNI), CSX Corp. (NYSE:CSX), Canadian Pacific Railway (NYSE:CP), Daqin Railway Co. (601006), QR National (QRN), Kansas City Southern (NYSE:KSU), Tobu Railway Co. (9001), Genesee & Wyoming (NYSE:GWR), and Globaltrans Investment (NYSEARCA:GLTR). The table below shows the preliminary results along with the recent trend for revenues, net income, and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 2,693.0 2,874.0 2,789.0 2,797.0 2,889.0
Revenue Growth % (6.3) 3.0 (0.3) (3.2) 0.8
Net Income 402.0 524.0 410.0 477.0 554.0
Net Income Growth % (23.3) 27.8 (14.0) (13.9) (0.5)
Net Margin % 14.9 18.2 14.7 17.1 19.2
ROE % (Annualized) 16.5 21.4 16.5 18.9 21.2
ROA % (Annualized) 5.4 7.2 5.6 6.6 7.8

Valuation Drivers

Norfolk Southern's current price/book of 2.2 is about median in its peer group. The market expects less growth from Norfolk Southern than the median of its chosen peers (P/E of 11.9 compared to peer median of 15.4), and for its current rates of return that are around peer median (ROE of 18.1%) to decline.

The company's asset efficiency (asset turns of 0.4 times) and net profit margins of 16.3% are both median for its peer group. Norfolk Southern's net margin has declined 0.8 percentage points from last year's high but remains above its five-year average net margin of 15.4.

Economic Moat

The company enjoys both better than its peer median annual revenue growth of 17.4% and better than its peer median earnings growth performance 28.2%. Norfolk Southern currently converts every 1% of change in annual revenue into 1.6% of change in annual reported earnings. We view this company as a leader among its peers.

Norfolk Southern's return on assets currently is around the peer median (6.2% vs. the peer median of 6.2%) -- similar to its returns over the past five years (5.5% vs. the peer median of 5.4%). This performance suggests that the company has no specific competitive advantages relative to its peers.

The company's gross margin of 38.9% is around the peer median, suggesting that Norfolk Southern's operations do not benefit from any differentiating pricing advantage. In addition, Norfolk Southern's pre-tax margin of 25.4% is also around the peer median, suggesting no operating cost advantage relative to its peers.

Growth and Investment Strategy

Norfolk Southern's revenues have grown more slowly than the peer median over the last few years (1.6% vs. 4.5%, respectively, for the past three years), and the stock price's relatively low P/E ratio of 11.9 implies relatively low future growth as well. Overall, we view the company's growth expectations as substandard relative to its peers.

Norfolk Southern's annualized rate of change in capital of 2.4% over the past three years is less than its peer median of 4.2%. This investment has generated a peer median return on capital of 8.5% averaged over the same three years. The median return on capital investment on a relatively lower investment suggests that the company is underinvesting.

Earnings Quality

Norfolk Southern's net income margin for the last 12 months is around the peer median (16.3% vs. the peer median of 15.9%). This average margin combined with a level of accruals that is around the peer median (10.1% vs. the peer median of 10.1%) suggests there possibly isn't too much accrual movement flowing into the company's reported earnings.

Norfolk Southern's accruals over the last 12 months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Company Profile

Norfolk Southern transports coal and industrial products. It operates an intermodal network through its subsidiary, Norfolk Southern Railway Co., which operates as a container port in the Eastern United States and provides connections to other rail carriers. The company is also engaged in the rail transportation business, which controls a major freight railroad. Norfolk Southern also transports overseas freight through several Atlantic and Gulf Coast ports. The company was founded on July 23, 1980, and is headquartered in Norfolk, Va.

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. I have no business relationship with any company whose stock is mentioned in this article.

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