I Think The Analysts Have It Wrong: Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP)

Page 1 of 2

Earnings Analysis: Norfolk Southern Corp. (NYSE: NSC)One way to make money in the market is to look for companies that are consistently beating analyst expectations, yet the market still undervalues the shares. I believe that’s exactly what’s happening at Norfolk Southern Corp. (NYSE:NSC). I’ve argued several times that railroad stocks seem poised to benefit from a continued recovery in the economy. With analysts predicting double digit earnings growth from “the big 3,” they seem to agree with this idea. However, analysts are calling for slower growth at Norfolk Southern versus their rivals, and if the company can continue on its current track, this disconnect could be the key to making money on the stock.

The Company’s Lack Of Clarity Provides Opportunity
Unfortunately for Norfolk Southern investors, the company doesn’t give as much detail in their earnings as their competition. It’s not unusual for Union Pacific Corporation (NYSE:UNP) to give some detail about coal shipments, autos, chemicals, and other industries. CSX Corporation (NYSE:CSX) goes even further by making comments about why they believe shipments were up or down in certain industries. If you want to know the future direction of the economy, look at the railroad earnings reports.

Norfolk Southern for some reason hasn’t gotten on board (pardon the pun) with this idea. The company only reports three segments, coal, general merchandise, and intermodal. In the current quarter, general merchandise revenue was up 4%, and intermodal revenue increased 5%. The bad news just kept on coming from the coal industry, as coal revenues were down 23%. Since Norfolk gets 24.48% of its revenues from coal, this was a major drag on results.

Norfolk did at least give some information on the direction of volumes in several industries. The company singled out chemicals, auto, and housing shipments as all being up in the last few months. What this tells investors is, coal is the problem, and if this relationship changes, Norfolk Southern investors could be in for a nice surprise.

In The Meantime…
I won’t begin to predict when coal shipments will slow their decline or turn upward, but I do understand supply and demand. It’s likely that coal is experiencing a trough because of low natural gas prices. As natural gas prices stabilize, coal demand will pick back up.

While investors wait for this to occur, Norfolk Southern is doing what they can for shareholders. If you look at their operating cash flow, you get a sense of management’s responsible decision making. Union Pacific was the only one of the big three to report growth in operating cash flow of 4.9%. However, this was due to a smaller reliance on coal (20.08% of revenue) and a lower rate of decline (7%). CSX on the other hand, saw a decline of 15.61% in operating cash flow. The company has a larger reliance on coal (25.9%), and reported a significant decline in revenue from this industry of 18%. By comparison, Norfolk Southern saw operating cash flow decline by just 5.02%, because management tried to mitigate the damage by reducing expenses.

One way that Norfolk significantly outperformed its peers was by repurchasing shares over the last year. Norfolk retired nearly 6% of their diluted share count in the last year. CSX retired 2.65% and Union Pacific retired about 3%. With relatively twice as many shares retired, when earnings improve, Norfolk’s EPS should improve faster than their competition.

Norfolk’s history of outperformance suggests that they may continue to surprise analysts. While it’s true that past history may not necessarily predict results, it’s amazing the number of times a company continues to exceed estimates when they have established this pattern. Believe it or not, all three major railroads exceeded analyst expectations in all four quarters last year. However, analysts are calling for 10.44% growth at Norfolk versus 12.15% growth at CSX and 14.43% growth at Union Pacific. Even if Norfolk continues its current streak of exceeding expectations by 6% on average, the company would report EPS growth of 11.08% instead of 10.44% as expected.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!