Railroads Stocks

Norfolk Southern Corp Valuation – August 2016 $NSC

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today - July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Norfolk Southern Corp (NSC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Norfolk Southern Corporation is a holding company engaged in the rail transportation business. The Company operates approximately 20,000 miles of road primarily in the East and Midwest. The Company is engaged in the rail transportation of raw materials, intermediate products and finished goods primarily in the Southeast, East and Midwest. The Company, through interchange with rail carriers, to and from the rest of the United States. The Company also transports overseas freight through various Atlantic and Gulf Coast ports. It provides logistics services and offers the intermodal network in the eastern half of the United States. The Company’s system reaches various manufacturing plants, electric generating facilities, mines, distribution centers and other businesses located in its service area. The Company’s intermodal market group consists of shipments moving in trailers, domestic and international containers, and RoadRailer equipment.

NSC Chart

NSC data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of NSC – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $25,878,025,539 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.06 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 52.65% Pass
6. Moderate PEmg Ratio PEmg < 20 16.02 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.15 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.06 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 72.34 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

NSC value chart August 2016

EPSmg $5.55
MG Growth Estimate 2.66%
MG Value $76.66
Opinion Overvalued
MG Grade B-
MG Value based on 3% Growth $80.45
MG Value based on 0% Growth $47.16
Market Implied Growth Rate 3.76%
Current Price $88.88
% of Intrinsic Value 115.94%

Norfolk Southern Corp. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.71 in 2012 to an estimated $5.55 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 3.76% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Norfolk Southern Corp. revealed the company was trading above its Graham Number of $70.21. The company pays a dividend of $2.36 per share, for a yield of 2.7%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 16.02, which was below the industry average of 18.13, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-66.83.

Norfolk Southern Corp. performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

NSC charts August 2016

Net Current Asset Value (NCAV) -$66.83
Graham Number $70.21
PEmg 16.02
Current Ratio 1.06
PB Ratio 2.15
Current Dividend $2.36
Dividend Yield 2.66%
Number of Consecutive Years of Dividend Growth 15

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $2,239,000,000
Total Current Liabilities $2,107,000,000
Long-Term Debt $9,549,000,000
Total Assets $34,334,000,000
Intangible Assets $0
Total Liabilities $22,061,000,000
Shares Outstanding (Diluted Average) 296,600,000

Earnings Per Share History

Next Fiscal Year Estimate $5.24
Dec2015 $5.10
Dec2014 $6.39
Dec2013 $6.04
Dec2012 $5.37
Dec2011 $5.45
Dec2010 $4.00
Dec2009 $2.76
Dec2008 $4.52
Dec2007 $3.68
Dec2006 $3.57
Dec2005 $3.11
Dec2004 $2.31
Dec2003 $1.37
Dec2002 $1.18
Dec2001 $0.97
Dec2000 $0.45
Dec1999 $0.63
Dec1998 $1.93
Dec1997 $1.90
Dec1996 $2.03

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.55
Dec2015 $5.69
Dec2014 $5.81
Dec2013 $5.25
Dec2012 $4.71
Dec2011 $4.28
Dec2010 $3.70
Dec2009 $3.54
Dec2008 $3.77
Dec2007 $3.20
Dec2006 $2.74
Dec2005 $2.15
Dec2004 $1.53
Dec2003 $1.07
Dec2002 $0.95
Dec2001 $0.95
Dec2000 $1.09

Recommended Reading:

Other ModernGraham posts about the company

26 Best Stocks For Value Investors This Week – 2/6/16
Norfolk Southern Corp Valuation – February 2016 Update $NSC
10 Undervalued Companies for the Defensive Dividend Stock Investor – February 2016
10 Undervalued Companies for the Defensive Dividend Stock Investor – September 2015
15 Best Stocks For Value Investors This Week – 9/12/15

Other ModernGraham posts about related companies

CSX Corporation Valuation – August 2016 $CSX
Union Pacific Corp Valuation – August 2016 $UNP
Norfolk Southern Corp Valuation – February 2016 Update $NSC
CSX Corporation Valuation – February 2016 Update $CSX
Union Pacific Corporation Valuation – February 2016 Update $UNP
Norfolk Southern Corporation Analysis – September 2015 Update $NSC
CSX Corporation Valuation – February 2016 Update $CSX
Union Pacific Corporation Valuation – February 2016 Update $UNP
Norfolk Southern Corporation Analysis – September 2015 Update $NSC
Kansas City Southern Analysis – August 2015 Update $KSU

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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