Norfolk Southern Corp (NSC, Financial) recently experienced a daily loss of 3.28%, contributing to a 3-month decline of 11.74%. Despite these figures, the company boasts an Earnings Per Share (EPS) of 6.21. This analysis seeks to determine whether Norfolk Southern is modestly undervalued by comparing its current market price to the GF Value, which suggests a fair value of $257.16 per share.
Company Overview
Operating over 20,000 miles of track in the Eastern United States, Norfolk Southern is a premier transporter of coal, intermodal traffic, and various commodities including automobiles, agriculture, and chemicals. With a market capitalization of $50.70 billion and annual sales of $12 billion, the company is a significant player in the transportation industry. The current stock price of $224.53, when juxtaposed with the GF Value, indicates that the stock might be trading at a modest undervaluation.
Understanding GF Value
The GF Value is a proprietary measure calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. This metric suggests that Norfolk Southern's stock is currently priced below its intrinsic value, which implies a potential for higher future returns. The company's stock price tends to gravitate towards the GF Value line, which is considered its fair market value.
Financial Strength and Risks
Norfolk Southern's financial strength is crucial for assessing its investment risks. The company's cash-to-debt ratio is 0.04, which is lower than 93.9% of its peers in the transportation industry. This indicates a higher risk of financial distress. The overall financial strength rating of 4 out of 10 suggests that investors should be cautious about the company's high leverage.
Profitability and Growth Prospects
Despite its financial risks, Norfolk Southern has maintained strong profitability, with an operating margin of 33.87%, ranking it better than 90.62% of its industry counterparts. The company has also demonstrated a solid track record of profitability over the past decade. However, its growth metrics indicate mixed signals. While the 3-year average annual revenue growth rate stands at 11.9%, the EBITDA growth rate is somewhat lagging, positioned lower than 63.65% of the companies in the same industry.
Investment Considerations: ROIC vs. WACC
An essential aspect of evaluating Norfolk Southern's investment potential is comparing its Return on Invested Capital (ROIC) against the Weighted Average Cost of Capital (WACC). Currently, the ROIC is 8.35%, which is below the WACC of 10.43%. This discrepancy indicates that the company is not generating sufficient returns on its capital investments relative to its cost of capital, which could be a red flag for potential investors.
Conclusion
While Norfolk Southern appears modestly undervalued according to the GF Value, potential investors should weigh the company's poor financial strength against its strong profitability and mixed growth indicators. For those interested in further details about Norfolk Southern's financials, consider examining its 30-Year Financials here.
To discover other high-quality companies that may deliver above-average returns at reduced risk, please visit the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
