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

It All Comes Down To Growth And Dividends
I think the growth prediction for Union Pacific is probably spot on because of their lower reliance on coal. However, I think the Norfolk Southern and CSX growth numbers will probably come in the reverse of what’s expected. CSX showed they have a higher reliance on coal, and they reported much worse cash flow growth compared to Norfolk Southern. On the flip side, Norfolk has less reliance on coal and better expense management. Since both stocks sell for similar forward P/E ratios, imagine what happens if Norfolk reports 12% EPS growth instead of 10%. As a cautionary tale, CSX investors should also imagine the markdown if their company reports 10% growth when the market expects 12%.

I also think the market is underestimating the value of Norfolk Southern’s dividend. Currently the stock yields about 2.8% and is covered by a roughly 75% payout ratio. By comparison, CSX pays about 2.5%, but has a 92% payout ratio. The higher yield and better payout ratio argues that Norfolk should have a higher valuation, but that isn’t occurring. Union Pacific’s 2% yield is helped by the fact that the company’s payout ratio is just 47%.

The bottom line is, Norfolk Southern bought back more shares, has the best yield, and may surprise to the upside with earnings per share. The company should trade at a discount to Union Pacific, but it seems Norfolk should be valued more highly than CSX. I think the 10% EPS growth analysts are calling for is too low, and investors likely have just the next few months to take advantage of this opportunity.

The article I Think The Analysts Have It Wrong originally appeared on Fool.com and is written by Chad Henage.

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