Turning Bullish On Norfolk Southern Ahead Of Earnings

Core Viewpoint - Norfolk Southern (NYSE:NSC) is positioned to potentially outperform the market in the coming years despite recent challenges, particularly the financial impact of the East Palestine derailment, which incurred $1.7 billion in additional costs [1][9]. Financial Performance - Norfolk Southern's stock has shown volatility, with a downgrade to hold after a soft Q1 2024 report, but there is optimism for recovery as the stock has underperformed the market by over 21 percentage points since then [2]. - The company is expected to report a revenue growth of 4% to $3.1 billion in Q2, driven by increased volumes and lower input costs, with an anticipated EPS growth above 5% [8]. Market Dynamics - The Association of American Railroads (AAR) reported a 39% increase in intermodal originations, which is significant for Norfolk as intermodal accounts for about 25% of its revenue [3][4]. - Chemicals, a key commodity for Norfolk, saw a 6.7% increase in June, indicating potential growth in manufacturing and related sectors [5]. Operational Efficiency - Norfolk's operating ratio (OR) is expected to improve as traffic increases, although it currently stands above 90% due to the derailment costs; adjusted figures suggest an OR closer to 70% [4][6]. - The company typically spends around $500 million per quarter in capital expenditures, leading to an expected free cash flow (FCF) yield of 4.1%, which is higher than the current 3% due to derailment costs [8]. Investment Outlook - The current price-to-earnings (PE) ratio is 34, but the forward PE is projected to be below 22, suggesting that Norfolk's earnings could be higher than expected, potentially reaching close to $12 per share [8][9]. - The company’s dividend payout ratio is currently affected by the derailment costs but typically ranges from 30% to 35%, indicating a stable return for investors [8].