We are initiating coverage on Norfolk Southern (NSC) with a Neutral recommendation. Currently, the stock has a Zacks Rank of #3 (Hold).
 
In the reviving economy, we believe Norfolk is favorably positioned for the near term. Volume gains are also likely across most of the business segments as the economy continues to gain traction. The company is hiring back the employees it had furloughed during the recession and remains committed to shareholders in the form of higher dividend and share buybacks.
 
Norfolk’s second quarter adjusted earnings per share surpassed the Zacks Consensus Estimate and the year-ago quarter’s results driven by increased shipments, higher pricing and strong operating leverage. Net income jumped 59% year over year on economic revival, which led to the increase in volume growth and revenues.
 
The company has a healthy balance sheet with cash and cash equivalents of $1.1 billion at the end of June 2010. Total debt-to-total capitalization ratio decreased sequentially to 38.3% from 39.9% at the end of March 2010. Norfolk recently increased its quarterly dividend by 6% to 36 cents per share, equating to an annualized dividend of $1.44 per share with a yield of 2.68%. This is higher than its primary competitor CSX Corp.’s (CSX) dividend yield of 1.92%.
 
We remain bullish on the company’s long-term fundamentals and growth prospects attributable to its continued investments in key projects and new business opportunities. Norfolk has undertaken various long-term projects such as “CREATE”, “Crescent Corridor” and “Track 2012”, expected to be completed by 2012. These initiatives aim at increasing flexibility, reducing highway congestion and offering truck-competitive services.
 
We believe that management’s increased confidence in Norfolk’s future prospects will make the company stronger relative to its peers. However, we remain cautious on forest products and expect unionized workforce, competitive pressures and increased railroad regulation to limit the upside potential of the stock. Norfolk faces intense competition from motor carriers and railroads, and substantial competition from ships, barges and pipelines.
 
Norfolk Southern Corporation controls a major freight railroad, Norfolk Southern Railway Company, which is primarily engaged in the rail transportation of raw materials, intermediate products and finished goods primarily in the Southeast, East, and Midwest. Norfolk Southern provides logistics services and offers intermodal network in the eastern half of the United States. The company is based in Norfolk, Virginia. Norfolk Southern and CSX Corporation jointly own Conrail Inc., whose primary subsidiary is Consolidated Rail Corporation.
 
CSX CORP (CSX): Free Stock Analysis Report
 
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
 
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