Company Review: Norfolk Southern Corp (NSC)

Company Profile:  Norfolk Southern Corp. (NSC) (obtained via Google Finance)

Norfolk Southern Corporation (Norfolk Southern) and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of NSR and CSX Transportation Inc. (CSXT). Norfolk Southern Corporation and Subsidiaries’ (NS) non-carrier subsidiaries engage principally in the acquisition, leasing and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications, and the leasing or sale of rail property and equipment.

Business and Management Review
1) Is the business simple and understandable?

Norfolk Southern is in the primary business of freight transportation.  Its focus is mostly on rail operations.  As we have said previously, the rail industry is simple and understandable.

2) Does the business have a consistent operating history?

Norfolk Southern is the culmination of over 300 railway lines that have merged over the last two centuries.  The most recognizable name on the list of merged lines is Penn Central.  Overall, the company has maintained a consistent focus on rail transportation throughout its history.  Financially, the company has achieved a positive net income for over 10 years and has paid a dividend for over 20 years.

3) Does the business have favorable long term prospects?

As we have said all week, the rail industry appears to have good prospects for continued existence.  There will be railroads in 100 years as there will still be a need for the transportation of heavy goods and resources.  As for Norfolk Southern, the company is well diversified across the nation and has the capabilities of acquiring other lines across the globe for further growth.

4) Is management rational?

We are encouraged by management’s focus on its shareholders.  Beginning with the mission statement, there is a clear and distinct view that the primary goal of the company is to maximize shareholder value over the long-term.  We see no reason to believe the management is irrational.

5) Is management candid with its shareholders?

Norfolk Southern has a standard investor relations site with all of the usual information available for shareholders.  They have also devoted a portion of their corporate website to the history of the company, which is well worth a read. 

6) Does management resist the institutional imperative?

We have found no reason to doubt that management has fallen under the spell of the institutional imperative.

Financial and Value Review
Defensive:
1) Size of firm

The market cap of Norfolk Southern is $20.83 billion.  Pass.

2) Strong financial condition

The company’s current ratio is about 1.4, below the 2.0 requirement.  Fail.

3) Earnings stability

The company has had a positive net income for over 10 years.  Pass.

4) Dividend record

Norfolk Southern has paid a dividend for over 10 years.  Pass.

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  Pass.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 24.15, the requirement of under 20 is not met.   Also, the company’s trailing 12-month PE ratio is 14.41.  It should be noted that this discrepancy in ratios is due to higher than usual earnings in the latest reported year.  Since we base the requirement on our PE ratio being below 20, the company fails this test.

7) Price to assets analysis

Though the PB ratio is only 2.09, allowing it to pass half of this requirement, the multiple of its PE and PB ratios is over 50.  Fail.

Overall

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Providence and Worcester is suitable for the defensive investor.

Enterprising:
1) Strong financial condition

The company’s current ratio is below 1.5.  Fail.

2) Earnings stability

The company has achieved a positive net income for over 5 years.  It passes the test.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

Overall

We find the company to be suitable for the enterprising investor, having passed 3 out of 4 tests.

Valuation:

Our valuation model finds a fair value to be around $47. 

Opinion:

Since the company is currently trading at about $50, we feel it is fairly valued but may be a suitable investment for the enterprising investor.

Neither of us held a position in Norfolk Southern Corp. at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the last part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:
Monday, January 8 – Jon – Burlington Northern Santa Fe (BNI)
Tuesday, January 9 – Ben – Union Pacific Corporation (UNP)
Wednesday, January 10 – Jon – Kansas City Southern (KSU)
Thursday, January 11 – Ben – Providence & Worcester Railroad Co (PWX)
Monday, January 15 – Jon – The Greenbriar Companies (GBX)
Tuesday, January 16 – Ben – Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 – Jon – Canadian National Railway (CNI)
Thursday, January 18 – Ben – Norfolk Southern Corporation (NSC)
Monday, January 22 – Ben – Overall Industry Analysis & Introduction of Next Industry


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