The transportation industry is one of the most exposed to oil prices increments. Fixed way transport however, is also especially affected by weather. There is no clearer example than Canadian railroad companies today. There is a record wheat harvest to be carried, but the impossibility to pick up the rails and relocate them away from bad weather, continue to slow grain arrivals. Most importantly, some oil is being transported through rails increasing demand for cars. The situation prompted the intervention of government authorities and drafting of a bill to regulate rail transportation. Responses to the initiative have not been uniform, and while railroad operators bashed the project, terminal lifters have supported it. Last, some traffic will be deviated south, through the US in order to meet stipulated transported quotas. Did gurus anticipate the move? Can it explain the reason for heavy investing on Norfolk Southern (NYSE:NSC)?
Keeping the Train Going
- Warning! GuruFocus has detected 8 Warning Signs with NSC. Click here to check it out.
- NSC 15-Year Financial Data
- The intrinsic value of NSC
- Peter Lynch Chart of NSC
In an effort to continue profiting from otherwise sitting capital, but also attracting public back to a downtrodden mode of transport, Norfolk Southern announced a new service Tri-County Mountaineer. The ex-Southern Railway 2-8-0 #630 steam locomotive, has been refurbished to cruise a 72-mile round trip every Saturday and Sunday. Such tourist attraction is expected to have a small impact in overall revenue, but an important social impact. In other words, the project intents to caught the attention of the American public, and remind them the train remains an option for travelling and shipping goods.
Out of 15 reports issued on Norfolk Southern by 13 different financial institutions between January and March, only Zacks, Barclays and Deutsche Bank assigned the stock a “Hold” rating. During the last few days, however, Atlantic Securities downgraded the rating to “Neutral” and analysts at Sanford C. Bernstein reduced target price. In all, target price is expected to remain above the $100 mark. But, analysts began to look at future overall performance more careful, as 2013’s results may be hard to match.
The difficulty to match 2013’s growth arises from Norfolk Southern’s 2012 performance. In other words, performance in 2013 recovered from the decline seen in 2012 exceeding results posted in 2011. Difficulties do not arise only from an intention to keep performance at high levels, but also from unresolved legal issues. Specifically, management is uncertain about the liability the company is exposed, and in consequence cannot asses the expected impact over performance.
Pushing for Success
Norfolk Southern currently trades at 15.6 times its trailing earnings, and carries a 17% discount to the industry average. Most importantly, the company has reached a growth ceiling that has stalled growth for the last three years. Debt deserves a special mention due to the high level at which it stands, putting a serious threat to the viability of the business model. The gravity of the situation is somewhat eased by the ample operating margins held by the firm, close to 30 points for the last four years.
The losses experienced in the coal segment, Norfolk Southern has replaced with improvements in the merchandise and intermodal segments coupled with enhanced productivity measures. Crude shipment, frac sand shipments, along with shipment of shale-related liquid petroleum gases are expected to shoot demand in the short-term. Additional pushes in performance are expected from the automobile and metal industries. Most importantly, capital investment for 2014 has been set at $2.2 billion, of which over $910 million will be dedicated to roadway spending. The strategy will be sealed with long-term cost control measures and a strong free cash flow.
As of today, Peter Lynch would likely recommend prospect investors purchase this stock as earnings have dropped below the price. Most importantly, rewards should be greater than those obtained by gurus who purchased the stock during the last quarter of 2013. With a moderate quarterly dividend of $0.54, representing an annual yield of 2.29%, the stock is an attractive investment for the long term.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.