Barclay's analyst Brandon Oglenski recently downgraded Norfolk Southern Corp. (NSC, Financial) to equal weight citing potential slowdown in the U.S. industrial activity which is likely to adversely affect Norfolk's volume. According to the analyst,
“Incrementally softer industrial demand, challenging commodity markets, high relative inventories and significant USD appreciation suggest North American industrial activity could be in the penalty box well beyond this summer.”
Norfolk Southern Corp. reported disappointing numbers last quarter and the stock is under pressure since then. Citi analysts Christian Wetherbee and Prashant Rao also lowered their target price on the company post results 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 43% and 32% respectively according to Gurufocus' DCF calculator, NSC's stock has a margin of safety of just 2%. 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 Fair Value Calculator
CSX Corp Fair Value Calculator
Union Pacific Corp Fair Value Calculator
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.
