Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP): Get In On This Stock Before Buffett And Ackman Do

The majority of its intermodal shipments are now double-stacked, which allows Norfolk to move more cargo with fewer trips, leading to higher revenue per mile.

As natural gas prices tanked over the past few years, the trading in of coal for natural gas by the major power companies squeezed a number of major railroad operators, where coal transports have historically been a major part of revenues. Norfolk is mitigating this transition nicely, as revenues from intermodal should come close to passing coal this year as its top revenue generator. Intermodal volumes were up 8% in the past quarter, compared with coal being down 4%.

One of the real beauties of Norfolk is that the downside here is limited. The North American railroad system has one of the best-known legal economic moats in the world, as the railroad industry has infrastructure that just cannot be replicated. The amount of money that it would take to replicate such a network is unimaginable, not to mention the inability to access the land, where railroads hold age-old rights of way.

Risks to Consider: Norfolk could fail to maintain its managerial and operational improvements and revert to being a subpar railroad operator. Railroads are also inherently tied to the economy, so any unexpected pullback in the recovery could be a big negative.

Action to take –> Investors can buy Norfolk now for roughly 70 cents per dollar of assets, which is well below any of the other major railroads. With the inherent moat that the railroad industry provides, there’s not much room on the downside. With operational improvements, Norfolk should trade in line with the leading U.S. railroad operator, Union Pacific Corporation (NYSE:UNP), at 17.5 times earnings. That price-to-earnings multiple on analysts’ 2014 earnings per share estimates for Norfolk would yield a $110 price target.

P.S. — Norfolk reminds us a lot of one of those stocks you can buy and hold forever. The company’s roots date to 1881, and despite its recent underperformance, it has paid a dividend since 1987. StreetAuthority expert Elliott Gue and his team have put together a list of these “Forever Stocks” that investors can own forever. To find out the name and ticker symbols of these “Forever Stocks,” click here.

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The article Get In On This Stock Before Buffett And Ackman Do originally appeared on StreetAuthority and is written by Marshall Hargrave.