Norfolk Southern Corp. (NSC): Why This Railroad Is a Compelling Buy

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Railroads are often seen as a bellwether for the broader economy because of the amount of retail and manufactured goods they transport across the nation. Norfolk Southern Corp. (NYSE:NSC) is one of the biggest railroads in the United States, with a $23 billion market capitalization. In addition, Norfolk Southern Corp. (NYSE:NSC) operates approximately 20,000 route miles in 22 states and serves every major container port in the eastern US.

Norfolk Southern Corp. (NYSE:NSC)

The railroad industry counts Warren Buffett, one of the world’s most famous investors of all time, as a fan. Buffett is a well-known railroad enthusiast and proved it when his Berkshire Hathaway Inc. (NYSE:BRK.A) bought Burlington Northern Santa Fe, then the nation’s second-largest railroad, for $34 billion in 2009.

Should you follow the philosophy of the world’s most famous investor and add Norfolk Southern Corp. (NYSE:NSC) to your portfolio?

Railroad profits keep chugging along

Of course, Norfolk Southern Corp. (NYSE:NSC) isn’t the only railway operator in the United States. Major competitor Union Pacific Corporation (NYSE:UNP) operates a rail network including 31,000 route miles.

Union Pacific managed to impressively reverse the pattern of railroads reporting disappointing 2012 results, with last year being the most profitable year in the company’s 150-year history. Union Pacific Corporation (NYSE:UNP) reported full-year diluted earnings per share of $8.27, an increase of 23% year over year.

Furthermore, Union Pacific Corporation (NYSE:UNP)’s record results extended into the first quarter of 2013. The company’s diluted earnings per share represented another record, growing 13% year over year. Operating revenue grew 3%, also a new record.

In addition, Canada is home to some excellent railroads, including Canadian National Railway (USA) (NYSE:CNI), which carries a $40 billion market value.

Unfortunately, Canadian National Railway (USA) (NYSE:CNI)’s first quarter report was less than impressive. The company’s net income per share declined 25% during the first three months, year over year. Moreover, Canadian National Railway (USA) (NYSE:CNI)’s operating ratio, which compares expenses to sales, deteriorated by more than two percentage points. This was due largely to a 7.7% increase in fuel costs.

That being said, analysts were quick to point to the extremely tough weather conditions seen in the first quarter and are more optimistic about the company’s future.

Meanwhile, Norfolk Southern Corp. (NYSE:NSC) recently issued a very solid first-quarter earnings report. The railroad reported 15% growth in diluted earnings per share on $2.7 billion in railway operating revenues through the first three months of the year.

Shipment volumes increased 3% year over year, and particular strength was seen in the company’s general merchandise revenues (up 2%) and in its intermodal revenues (up 9%) versus the prior year’s first quarter.

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