Argus analyst recently lowered his EPS estimates and price target on Norfolk Southern (NSC, Financial). While his price target is now reduced to $115.00 (from $125.00), his 2015 and 2016 EPS estimates are now reduced to $6.10 (from $7.17) and $7.05 (from $7.75), respectively.
Argus analyst is not alone in reducing his estimates. Norfolk Southern’s stock is under pressure since it reported disappointing numbers last month. After Norfolk's earnings miss, Citi analysts Christian Wetherbee and Prashant Rao also lowered their target price on the company and wrote,
“The revenue expectation for $2.6b is in line with our recently lowered estimates, with the miss primarily driven by higher weather and service-recovery costs...Norfolk’s operations appear to be challenged by resource availability and inability to recover from tougher than expected weather. With consensus estimates headed toward our much lower expectations, we expect shares to be under sharp pressure."
In addition to operational issues, Norfolk Southern is also overvalued as compared to its peers like Union Pacific (UNP, Financial) and CSX Corp (CSX, Financial). While UNP and CSX have margin of safety of 38% and 25% respectively according to Gurufocus's DCF calculator, NSC's stock is overvalued by 9%. Business predictability ratings of NSC at 3.5 star is also lower than UNP and CSX, both of which have a 4.5 star business predictability rating.
Norfolk Southern's long term earnings growth rate also trails UNP and CSX. While Union Pacific has a historical 10-year EPS growth rate of 22% and CSX has it at 17%, Norfolk Southern's 10-year EPS growth rate is almost half at 9.10%. Despite the slower growth rate and lower business predictability rating, Norfolk Southern's forward PE is almost inline with UNP and CSX at ~14x. I believe investors should avoid Norfolk and buy Union Pacific and CSX corp instead as they offer a better risk reward opportunity.
