On December 11, 2023, Norfolk Southern Corp (NSC, Financial) experienced a slight dip in its stock price, closing at $221 per share with a day's change of -2.81%. Despite this daily fluctuation, the company has seen a 3-month gain of 13.77%. With an Earnings Per Share (EPS) of 9.12, investors and analysts are keenly interested in determining whether the stock is modestly undervalued. This article delves into a valuation analysis to shed light on this question and encourages readers to explore the comprehensive financial assessment that follows.
Company Introduction
Class-I railroad Norfolk Southern operates extensively in the Eastern United States, managing over 20,000 miles of track. The company's diverse portfolio includes hauling shipments of coal, intermodal traffic, and a variety of products such as automobiles, agriculture, metals, chemicals, and forest products. Currently, with a market cap of $50 billion and sales of $12.30 billion, Norfolk Southern presents an intriguing case when its stock price is juxtaposed with the GF Value—an estimation of the stock's fair value at $299.61. This comparison sets the stage for an in-depth valuation analysis.
Summarize GF Value
The GF Value is a unique valuation metric that reflects the intrinsic value of a stock, incorporating historical trading multiples, a GuruFocus adjustment factor for past performance and growth, and future business performance estimates. Norfolk Southern (NSC, Financial) is currently indicated as modestly undervalued according to the GF Value, suggesting a potential for higher future returns compared to its business growth. The GF Value Line serves as a benchmark, indicating that the stock price may converge towards this fair value over time.
Because Norfolk Southern is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, implying a favorable investment opportunity for value investors.
Link: These companies may deliver higher future returns at reduced risk.Financial Strength
Investing in companies with robust financial strength is crucial to minimize the risk of permanent capital loss. Norfolk Southern's financial strength is assessed by indicators such as the cash-to-debt ratio and interest coverage. The company's cash-to-debt ratio stands at 0.09, which is lower than 85.79% of its peers in the Transportation industry. This positions Norfolk Southern's overall financial strength at a score of 4 out of 10, reflecting a need for caution from a financial health perspective.
Profitability and Growth
Profitability is a key factor for assessing investment safety, and companies with consistent profitability are often more reliable. Norfolk Southern has maintained profitability for the last decade, with a remarkable operating margin of 35.58%, ranking it higher than 92.49% of the Transportation industry. The company's growth also plays a pivotal role in valuation, with a 3-year average annual revenue growth of 8.3% and EBITDA growth rate of 9.2%, signifying a competitive edge within its sector.
ROIC vs WACC
Evaluating a company's efficiency in generating cash flow relative to its invested capital can be done by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). Norfolk Southern's ROIC over the past 12 months is 8.85%, which is less than its WACC of 10.02%, indicating that the company may not be creating value for its shareholders as efficiently as possible.
Conclusion
In conclusion, the current stock valuation of Norfolk Southern Corp (NSC, Financial) suggests that it is modestly undervalued. Despite its strong profitability and competitive growth, the company's financial condition does warrant a degree of caution. Investors interested in Norfolk Southern can gain further insights by examining its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
