Why Did Norfolk Southern Stock Fall 30% Since 2021?

After a 17% fall, year-to-date, Norfolk Southern stock (NYSE: NSC) has some room for growth, in our view. NSC stock has declined from $248 in early January to around $205 now. The YTD 17% fall for Norfolk Southern marks an underperformance with the 2% returns for the broader S&P500 index. The recent fall for Norfolk Southern can be attributed to the derailment of a train carrying toxic materials in East Palestine, Ohio last month. Ohio state has sued Norfolk Southern over the incident.

Looking at a slightly longer term, NSC stock is down 31% from levels seen in late 2021. This can be attributed to 1. the company’s P/S ratio, which plunged 42% to 3.7x trailing revenues, from 6.4x in 2021, partly offset by 2. a 14% rise in Norfolk Southern’s revenue to $13 billion, and 3. its average shares outstanding falling 4% to 231 million, driven by share repurchases of $3 billion. Our interactive dashboard, Why Norfolk Southern Stock Moved, has more details.

Norfolk Southern’s freight revenue rose 14% y-o-y in 2022, led by an 18% jump in average revenue per unit, while total units declined 3%. Although the company continues to see softer volume growth, it has benefited from a robust pricing environment clubbed with higher fuel surcharges, aiding the average revenue per carload. For perspective, Norfolk Southern’s total volume of carloads and intermodal units declined 10% between 2019 and 2022, while its average revenue per unit rose 25%.

Furthermore, the company has consistently improved its operating ratio, which fell to 62.3% in 2022, vs. 64.7% in  2019. The 2022 figure compares with 60.1% in 2021 due to an overall cost increase amid higher inflation. Our Norfolk Southern Operating Income Comparison dashboard offers more details. The company’s bottom line increased 17% y-o-y to $13.88 in 2022, led by higher revenues and share buybacks.

However, there are near-term headwinds for the company. The demand for railroad business can primarily be linked to economic growth. The current high inflationary environment, rising interest rates, and fears of a slowing economy will likely weigh on Norfolk Southern’s near-term performance. Furthermore, of late, the stock has been weighed down due to the East Palestine incident, and the company will likely face legal action for its involvement.

A Norfolk Southern cargo train derailed in East Palestine, Ohio, on Feb 3, 2023. Thirty-eight railcars were derailed, and 11 contained hazardous materials that caught fire. Norfolk Southern’s management has stated that it is committed to addressing the issues in East Palestine. It has completed hundreds of in-home air tests, removed over 2,300 tons of contaminated soil, and removed 3.5 million gallons of potentially affected liquids from the site. ^[1] The extent of damages Norfolk Southern has to bear is not known currently.

Looking at valuation, we find that NSC stock has room for growth. At its current level of $205, NSC is trading at 15x its forward expected earnings of $13.98 on a per share and adjusted basis, compared to the last three-year average of 20x. Even if we were to look at NSC stock from a P/S perspective, it is currently trading at just 3.7x trailing revenues, compared to the last three-year average of 5.6x. Our Norfolk Southern (NSC) Valuation Ratios Comparison has more details.

A slight decline in the trading multiple is justified, given the near-term headwinds and uncertainty around Ohio liability discussed above. However, the current and historical average gap looks steep in our view. We estimate Norfolk Southern’s valuation to be $249 per share, reflecting a 21% upside from its current market price of $205. Our price estimate of $249 is based on 18x forward earnings.

While NSC stock has more room for growth, it is helpful to see how Norfolk Southern’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for CSX vs. Amerco.

With inflation rising and the Fed raising interest rates, among other factors, NSC stock has fallen 17% this year. Can it drop more? See how low Norfolk Southern stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 3/16/2023
[2] Cumulative total returns since the end of 2016

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1. Ohio Sues Norfolk Southern Over East Palestine Train Derailment, Joseph De Avila, The Wall Street Journal, March 14, 2023 [↩]