Monday, Jefferies initiated coverage on Norfolk Southern Corporation (NYSE: NYSE:NSC) with a Buy rating and a price target set at $300.00. The firm highlighted the railroad company's potential for margin expansion and earnings growth compared to its peers.
Norfolk Southern, recognized as the third largest Class 1 railroad by revenue, is currently the smallest by market capitalization. The company's margin profile is more than 500 basis points lower than that of its closest competitor, CSX (NASDAQ:CSX). This difference is partly due to Norfolk Southern's increased operational costs following the Eastern Palestine derailment in February 2023 and a business mix that includes a larger share of lower-margin Intermodal business.
Jefferies anticipates that most Class 1 railroad peers have reached near peak sustainable levels in operational ratios and sees limited potential for further structural margin improvements. In contrast, Norfolk Southern is expected to experience above-peer margin expansion, potentially narrowing the operating ratio (OR) gap with CSX from over 500 basis points to 300 basis points by 2025.
The firm's optimism is based on Norfolk Southern's strategic plans to improve its business mix by focusing on higher-margin Merchandise volumes and shedding incremental costs that were added to the network. This progression is expected to extend beyond 2025, leading to above-peer earnings growth over the next five years as the company enhances its margin profile.
With Norfolk Southern's stock trading at less than 20 times the projected 2025 earnings per share, Jefferies believes the shares are currently undervalued, not fully reflecting the long-term earnings growth opportunity that lies ahead for the railroad operator.
InvestingPro Insights
As Jefferies projects a positive outlook for Norfolk Southern Corporation (NYSE: NSC), current real-time data from InvestingPro supports the firm's assessment of the company's potential for earnings growth. With a market capitalization of $56.48 billion and a Price to Earnings (P/E) ratio of 20.89 based on the last twelve months as of Q4 2023, NSC appears to be trading at a higher earnings multiple compared to some of its peers. This metric underscores Jefferies' view that the stock may be undervalued.
InvestingPro Tips reveal that Norfolk Southern has a strong track record of rewarding shareholders, having raised its dividend for 7 consecutive years and maintained dividend payments for 43 consecutive years. Additionally, analysts predict the company will continue to be profitable this year, a prediction supported by NSC's profitability over the last twelve months. The company's significant price uptick over the last six months, with a 32.25% total return, further indicates investor confidence in Norfolk Southern's growth trajectory.
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