Economic bellwether Norfolk Southern Corporation (NSC) delivered impressive third quarter results as revenue rose 18% year-over-year and EPS soared 34% to $1.59, beating the Zacks Consensus Estimate by 13%.
Analysts revised their estimates significantly higher for the railroad, sending the stock to a Zacks #2 Rank (Buy).
The company also pays a dividend that yields a solid 2.4%. Valuation is reasonable too, with shares sporting a PEG ratio of 0.8.
Company Description
Norfolk Southern Corporation owns two major freight railroads: Norfolk Southern Railway Company and Norfolk Western Railway Company, which operate predominantly across the eastern United States.
The company is headquartered in Norfolk, Virginia and has a market cap of $24.4 billion.
Third Quarter Results
Norfolk Southern delivered excellent third quarter results on October 26. The company reported record earnings per share of $1.59, crushing the Zacks Consensus Estimate of $1.41. It was a stellar 34% increase over the same quarter in 2010.
Railway operating revenues rose 18% year-over-year $2.889 billion, slightly ahead of the Zacks Consensus Estimate of $2.869 billion. Revenue per unit increased 14% over the same period.
Each segment experienced strong top-line growth, with coal revenues leading the way at 27%.
The railway operating ratio improved by 2.1% to 67.5% as the company leveraged its fixed expenses. These factors led to a 26% increase in income from operations.
Outlook
The vast majority of analysts revised their estimates higher for both 2011 and 2012 following the strong third quarter. This sent the stock to a Zacks #2 Rank (Buy).
CEO Wick Moorman stated in the third quarter earnings release that “We continue to see modest improvement in most of our business groups”. This bodes well for the overall economy as railroads like Norfolk Southern are good bellwethers of economic activity.
If the U.S. economy does not slip into another recession, Norfolk should continue to see solid top-line growth and strong bottom-line growth as the company continues to leverage its fixed expenses. Conversely, a sustained downturn in economic activity could send profit plummeting…and shares too.
Based on current consensus estimates, analysts are projecting strong growth for the company over the next couple of years. The Zacks Consensus Estimate for 2011 is $5.30, representing 36% growth over 2010 EPS. The 2012 consensus estimate is currently $5.94, corresponding with 12% growth.
As you can see in the company’s Price & Consensus chart, consensus estimates for 2011 and 2012 have steadily marched higher over the last several months:
Dividend
In addition to strong earnings growth potential, Norfolk pays a dividend that yields a solid 2.4%. The company held its dividend steady throughout the Great Recession and has raised it three times since mid-2010:
Valuation
Shares of NSC took a beating in the market pullback during late summer/early fall, but are now back up near their pre-pullback levels. But the valuation picture still looks reasonable.
Shares trade at 12.7x 12-month forward earnings, a discount to the industry average of 17.0x, and to its 10-year median of 13.6x.
It sports a PEG ratio of 0.8 based on a 5-year EPS growth rate of 16.1%.
The Bottom Line
With rising estimates, strong growth prospects, a solid dividend and reasonable valuation, Norfolk Southern offers investors a lot to like.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
