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Is Norfolk Southern Corp. (NSC) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Norfolk Southern Corp. (NYSE:NSC) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Norfolk Southern Corp. (NYSE:NSC)

What we’re looking for

The graphs you’re about to see tell Norfolk Southern Corp. (NYSE:NSC)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation
: Is share price growing in line with earnings per share?
3). Opportunities
: Is return on equity increasing while debt to equity declines?
4). Dividends
: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Norfolk’s key statistics:

NSC Total Return Price Chart

NSC Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 33% Pass
Improving profit margin 20.8% Pass
Free cash flow growth > Net income growth (37.6%) vs. 60.6% Fail
Improving EPS 86.7% Pass
Stock growth (+ 15%) < EPS growth 42.80% vs. 86.7% Pass

Source: YCharts. * Period begins at end of Q1 2010.

NSC Return on Equity Chart

NSC Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 64.9% Pass
Declining debt to equity 26.2% Fail
Dividend growth > 25% 47.1% Pass
Free cash flow payout ratio < 50% 105.4% Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we’re going

Norfolk Southern Corp. (NYSE:NSC) chugs along with a strong performance, earning six out of nine possible passing grades. A large amount of long-term debt, raised between 2008 and 2012, has cost it on the debt-to-equity analysis. Norfolk also endured a substantial decline in free cash flow, to the point where virtually all of its free cash is being spent on dividend payments. However, Norfolk has beaten the Street with 25% gains this year alone. Let’s dig a little deeper to find out what Norfolk is doing to maintain or grow its position.

Norfolk Southern Corp. (NYSE:NSC)’s revenue and net income have seen a steady rise over the last four years, but lots of money has been spent to upgrade rail infrastructure. Four corridors have seen improvements, while a new terminal has been built in Knoxville. This build-out has a long-term aim at cost savings — the company aims to save more than $100 million in expenses this year.

In the second quarter, Norfolk Southern Corp. (NYSE:NSC) reported a 2% increase in year-over-year volume. The rise was driven primarily by the chemicals (11%), intermodal (10%), and automotive (2%) segments. Coal has not been good to Norfolk, but agriculture and metals have also slowed. The moderate cuts on these segments represent a direct market-share gain for major rivals Canadian National Railway (USA) (NYSE:CNI) and CSX Corporation (NYSE:CSX). While Norfolk has some exposure to oil in Pennsylvania and Ohio, the firm is also benefiting from America’s economic recovery, despite reducing its exposure to the coal segment. Norfolk’s earnings declined by 8.7% year-over-year due to lower coal shipments, which comprised 20% of its 2012 revenues.

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