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

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
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 Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

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

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!