Norfolk Southern Stock, Buy or Sell?

Norfolk Southern (NYSE:NSC) administers a significant rail network to the east part of the United States.

Starting in 1982, after the merger of Norfolk and Western Railway and Southern Railway, it emerged as one of the biggest rail transport companies in the United States. The company distributes a wide variety of products, including coal, automobiles, chemicals, metals, and agricultural produce, making it an important link in the country’s supply chain.

In the near future, the company wants to upgrade its networks and offer more services to its customers and is poised to continue its dominance in the rail freight industry.

Nonetheless, headwinds are brewing so is it time to buy or sell Norfolk Southern?

Norfolk Southern’s Ohio Derailment Causing Huge Expenses

A major derailment of a Norfolk Southern train was observed in East Palestine, Ohio, in February 2023. The event received a good deal of attention because of the dangerous substances that were being transported by the train. About a dozen of cars were carrying hazardous materials such as vinyl chloride gas, which is a carcinogenic material that is used to make PVC plastic and is highly flammable.

The calamity resulted in a massive fire, and it also spewed toxic chemicals in the air, water and soil, posing health risks to the inhabitants of the area. The event made residents leave the area and vacate their houses.

The Environmental Protection Agency and the National Transportation Safety Board put pressure on Norfolk Southern and criticized the company for the event, prompting the company to engage in further safety actions and analyze its activities to avoid such occurrences in the future.

Since the derailment, Atlanta-based Norfolk Southern has received massive criticism, multiple federal investigations, and an attempted takeover by an activist investor group.

The company’s financial performance over the last year was affected by the derailment mishap. As a result of the level of environmental disaster, Norfolk Southern embarked on environmental remediation measures and allocated $1.1 billion to these activities, legal cases, and other issues.

All these expenses led to a reduction of income from railway operations, net income, and earnings per share compared to the prior year. Railway operating revenues decreased by 5% year over year, and the railway operating ratio worsened to 76.5%.

Income from railway operations had gone higher in 2022 based on increased fuel surcharge revenues and pricing improvements even when volumes dropped.

Earlier this year, the U.S. Department of Justice and the Environmental Protection Agency reached a settlement with Norfolk Southern, and it will have to pay nearly $235 million in order to cover EPA’s past and future costs for cleaning the air, water, and the soil in and around East Palestine, Ohio; where the train derailed. Also, in April, the company agreed to pay $600 million to settle a class action lawsuit.

The Freight Recession

The global freight industry has been in a significant recession over the past few years, which has been characterized by decreased volume and revenues in some of the main transportation segments. Several factors led to this decline, which makes it difficult for freight firms, such as Norfolk, to post high volumes.

The first cause of the freight recession was the overall slowing down of the global economy. Poor consumer demand, amplified by inflation and increased interest rates, resulted in lower expenditure on goods. This, in turn, affected the manufacturing and retail industries, which are essential shippers of freight.

Since some firms experienced a decline in orders and inventory buildup, the demand for transportation services was reduced. Plus, the common problem that emerged within the industry was overcapacity.

A recent report from the Federal Reserve of St. Louis shows railroad carload traffic declining 28% from May 2014 to May 2024.

Is There Any Improvement in Norfolk’s Southern’s Recent Financials?

There was an increase in Norfolk Southern’s revenue in the second quarter of 2024, marking the end of a string of revenue declines, growing evidence that the firm’s attempts to attract more volume while maintaining safety have been effective.

Railway operating revenues stood at $3.0 billion, up 2%, compared to the second quarter of 2023. Income from railway operations was $1.1 billion, an increase of 96% year over year.

The operating ratio in the quarter was 62.8% compared to 80.7% in the second quarter of 2023. However, on an adjusted basis, the operating ratio for the second quarter of 2024 was 65.1%, representing 160 basis points of improvement from the second quarter of 2023, which was 66.7%.

Also, the company’s adjusted EPS came in at $3.06, up 4% compared to the year-ago quarter.

Norfolk Southern Stock Buy or Sell?

Norfolk Southern stock is a Buy at this time with analysts forecasting upside to $268 per share.

The Board of Directors has raised the dividend in each of the past 7 years and it now sits at 2.14%, corresponding to an annual payout of $5.40 per share.

For the coming quarter, 15 analysts have revised their estimates higher suggesting a bullish swing in sentiment on more favorable fundamentals.

With all that said, it’s trading at a high price-to-earnings ratio of 31x, though net income growth of 16% annually over the next half decade makes it much more palatable.

Investors could be better off taking up a wait-and-watch approach for the stock at the moment. East Palestine’s train derailment caused terrible financial consequences to Norfolk Southern through a massive cost burden. Besides costs associated with specific cases, Norfolk Southern is facing macro headwinds that are affecting volume levels.

Although the company has demonstrated some level of improvement, it will be wise to track how management is implementing its recovery strategy further before investing in it.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.