We've been asking ourselves recently if the market has placed a fair valuation on Norfolk Southern. Let's dive into some of the fundamental values of this large-cap Industrials company to determine if there might be an opportunity here for value-minded investors.
Norfolk Southern's Valuation Is in Line With Its Sector Averages:
Norfolk Southern Corporation, together with its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods in the United States. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 20.49 and an average price to book (P/B) ratio of 3.78. In contrast, Norfolk Southern has a trailing 12 month P/E ratio of 17.3 and a P/B ratio of 4.03.
Norfolk Southern's PEG ratio is 3.11, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
Growing Revenues With a Flat Capital Expenditure Trend:
| 2019-12-31 | 2020-12-31 | 2021-12-31 | 2022-12-31 | |
|---|---|---|---|---|
| Revenue (MM) | $11,296 | $9,789 | $11,142 | $12,745 |
| Gross Margins | 41.9% | 41.3% | 44.8% | 43.3% |
| Operating Margins | 35.3% | 34.6% | 39.9% | 37.7% |
| Net Margins | 24.1% | 20.56% | 26.97% | 25.66% |
| Net Income (MM) | $2,722 | $2,013 | $3,005 | $3,270 |
| Net Interest Expense (MM) | -604 | -625 | -646 | -692 |
| Net Interest Expense (MM) | -$604 | -$625 | -$646 | -$692 |
| Depreciation & Amort. (MM) | -$1,139 | -$1,154 | -$1,181 | -$1,221 |
| Earnings Per Share | $10.25 | $7.84 | $12.11 | $13.0 |
| EPS Growth | n/a | -23.51% | 54.46% | 7.35% |
| Diluted Shares (MM) | 266 | 257 | 248 | 228 |
| Free Cash Flow (MM) | $1,873 | $2,143 | $2,785 | $2,274 |
| Capital Expenditures (MM) | -$2,019 | -$1,494 | -$1,470 | -$1,948 |
| Net Current Assets (MM) | -$20,658 | -$20,853 | -$22,685 | -$24,145 |
| Current Ratio | 0.9 | 1.07 | 0.86 | 0.76 |
| Long Term Debt (MM) | $11,880 | $12,102 | $13,287 | $14,479 |
| Net Debt / EBITDA | 2.22 | 2.68 | 2.28 | 2.44 |
Norfolk Southern benefits from growing revenues and a flat capital expenditure trend, a steady stream of strong cash flows, and average operating margins with a stable trend. The company's financial statements show positive EPS growth and healthy leverage. However, the firm has slimmer gross margins than its peers.
