Norfolk Southern Corporation (NSC) continues to benefit from strong demand for freight rail transportation due to the rebound in economic activity.

The railroad company recently posted better than expected financial results for the first quarter of 2011, sending analysts’ estimates soaring.

Based on consensus estimates, EPS is expected to grow 25% in 2011 and 15% in 2012. Despite this strong growth, shares trade at just 14.9x forward earnings with a PEG ratio of 0.8.

The company has also been returning value to shareholders through stock buybacks and dividend hikes. It currently yields 2.2%.

First Quarter Results

Norfolk Southern reported its results for the first quarter of 2011 on April 27. Earnings per share came in at 90 cents, in-line with the Zacks Consensus Estimate, and up 32% over the same quarter in 2010.

The market for freight rail transportation has been strong due the rebound in economic activity. Revenues for the quarter rose 17% year-over-year to $2.620 billion, beating the Zacks Consensus Estimate of $2.469 billion.

The company was negatively effected by rising fuel prices, however, as fuel costs soared 53% year-over-year. Nonetheless, adjusted operating income rose 17% due in part to a relatively high degree of operating leverage.

Estimates Soaring

Due to better than expected Q1 revenue, analysts virtually unanimously raised their earnings estimates for 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).

The 2011 Zacks Consensus Estimate has jumped from $4.62 just 30 days ago to $4.90, representing 25% growth over 2010 EPS. The 2012 consensus estimate jumped from $5.37 to $5.66 over the same period. This corresponds to 15% EPS growth.

Cyclical Stock

Earnings estimates have been moving consistently higher over the last several months as the economic recovery has gained traction. This can seen in the company’s Price & Consensus chart:

NSC: Norfolk Southern Corporation

Of course, through the Great Recession of 2008 and 2009, consensus estimates fell hard. This is due to the cyclicality of railroads and the double-edged soared of operating leverage. If economic activity slows for a sustained period of time, expect estimates – and the stock price – to take a big hit.

Returning Value to Shareholders

Norfolk Southern has been returning value to shareholders through stock buybacks and dividend increases. The company repurchased 5.3 million shares of stock in the first quarter at a cost of $343 million. Since 2005, it has spent $4.5 billion buying back 84.7 million shares.

After a significant dividend cut in 2001, the company has been aggressively raising it over the last 10 years, even throughout the Great Recession.

NSC: Norfolk Southern Corporation

It currently yields 2.2%.

Attractive Valuation

Despite shares jumping 8% off the strong quarter, valuation is still attractive on a forward-looking basis due to rising earnings estimates.

The stock sports an attractive PEG ratio of 0.8 based on a five-year annual growth rate of 17.9%. Shares are trading at 14.9x forward earnings, a significant discount to the industry average of 19.4x.

Norfolk Southern Corporation owns two major freight railroads: Norfolk Southern Railway Company and Norfolk Western Railway Company, which operate throughout North America.

Todd Bunton is the Growth & Income Stock Strategist for

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