Norfolk Southern Corporation (NSC): On the Right Track
Tuesday, February 16th, 2016
I like to invest in companies that are good, solid businesses.
It doesn't have to be some fancy new technology that is going to set the world on fire, but I'd like to buy companies that I can buy on sale.
One industry that I noticed has pulled back from their highs is the railroad industry. Back in 2009 I invested in Union Pacific Railroad, which we sold a couple years ago with a nice profit.
So I thought it may be time to take a look at a railroad company again because the business of transporting goods (such as cars, refrigerators, and even small parts) move via railroad, the cheapest form of transportation.
I looked at two different railroads: Union Pacific Railroad and Norfolk Southern Corporation. After reading over the initial fundamentals of the companies, I decided to take a closer look at Northfolk Southern Corporation (symbol NSC.) Norfolk Southern was founded back in 1883 and currently operates about 20,000 miles of railroad in 22 states and the District of Columbia. They also have passenger trains and provide logistic services.
The current PE is 14.3, which is well below the industry at 17 times earnings. Price-to-sales looks expensive at 2.1, versus 0.35. Price-to-tangible book value looks attractive at 1.8 because the industry average is not material. Price-to-cash flow for the railroad comes in at 8.3 and the industry is 1.2, but that seems out of line compared to the industry price earnings ratio.
With the current price of the stock investors get a nice dividend yield of 3.2%, and the company only uses 46% of their earnings to pay out that dividend.
As I expected, we are seeing sales and earnings decline, which is why the stock price has fallen roughly 36% from the 52-week high of $112 to the current $72 per-share. Year-over-year sales are down 9.6%, compared with the industry at 1.7%. Earnings per-share year-over-year for the last 12 months are down 20.5%, when the industry was up 20.3%. When I see numbers as strange as these, I realize the industry has other companies that are far different than the railroads.
Long-term safety of investing comes from companies with a strong balance sheet, and that is what we see here with Norfolk Southern. The current ratio is 1.2, just slightly under the industry at 1.3 so I'm not concerned about the liquidity of this company.
Debt-to-equity is 83 for the company, versus 850 for the industry. I am comfortable with a company with the debt-to-equity under 90%. The return on equity is also important, and that currently stands at 12.6 compared with the industry at 11.7. I was very impressed with the net profit margin this company comes in with at 21.9%, when the industry can only muster 2.1%.
Efficiency on the receivables looks good at 14.7, surpassing the industry average of 9.0. Another strange comparison is the inventory turnover of 6.1, versus the industry at 82.0. I would disregard the inventory turnover in this scenario.
Looking out until December 2017 I see the estimated earnings are six dollars per share. With a forward PE of 12 and using the 40 year average forward PE of 16.5, I get a target sell price of $99 per share. This would be a potential gain of 38% from the current stock price of around $72 per share.
I know the stock will not double in the near-term, but I think in the next two or three years (including the dividend) investors might realize an annual average return of around 10% per year.
I know that a railroad is not the most exciting thing, but it is a good long-term investment. However before investing in this company, be sure you conduct your own research and have a full understanding of what you've invested in.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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