Will Norfolk Southern Stock Rebound To Its Pre-Inflation Shock Highs?

Norfolk Southern stock (NYSE: NSC) currently trades at $223 per share, around 25% below its level of $298 on Jan 2, 2022 (pre-inflation shock high), and it seems like it has little room for growth. NSC saw its stock trading at around $227 at the end of June 2022, just before the Fed started increasing rates, and is now trading around those levels. In comparison, the S&P 500 gained about 17% during this period. NSC stock has been weighed down this year owing to the derailment of a train carrying toxic materials in East Palestine, Ohio, in February of this year. Furthermore, rising concerns over deteriorating economic growth have pressured its stock. 

Returning to the pre-inflation shock level means that NSC stock will have to gain more than 30% from here. However, we do not believe that will materialize any time soon, and we estimate Norfolk Southern’s valuation to be around $244 per share, just 10% above the market price. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. Norfolk Southern’s business will see an adverse impact on its volume if the U.S. economy were to go into recession. Also, it took a $387 million charge related to the Ohio derailment in Q1, and the overall costs could increase over time. 

Our detailed analysis of Norfolk Southern’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how NSC stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

NSC and S&P 500 Performance During 2007-08 Crisis

NSC stock rose from nearly $52 in September 2007 to $70 in August 2008 (pre-crisis peak) and fell sharply to $32 in March 2009 (as the markets bottomed out), implying NSC stock lost nearly 55% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $52 in early 2010, rising roughly 65% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Norfolk Southern’s Fundamentals Over Recent Years

Norfolk Southern’s revenues rose from $11.3 billion in 2019 to $13.0 billion in the last twelve month period. This can be attributed to a strong recovery in demand post the pandemic-induced lockdowns. Furthermore, the company realized substantial pricing gains, passing on the higher costs and higher fuel prices to the customers. For perspective, the company’s average revenue per carload grew 25% between 2019 and 2022, while its total carload volume was down 10%. Norfolk Southern’s EPS also increased from $10.32 to $13.92 per share over this period. The earnings growth was driven by higher revenues and an 11% decline in total shares outstanding as the company spent nearly $10 billion on share repurchases over the same period.

Does NSC Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Norfolk Southern’s total debt increased from $12.2 billion in 2019 to $15.0 billion now, while its total cash has remained around $0.6 billion. The company also has investments, which rose from $4.3 billion in 2019 to $4.8 billion in 2022. It also garners about $4 billion in cash flows from operations. The company’s financial position is healthy, and it appears to be in a good position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Norfolk Southern stock has the potential for good gains once fears of a potential recession are allayed. That said, fears of a potential recession and its impact on the railroad business and possible rise in costs associated with the Ohio derailment means it may take a while for NSC stock to reach its pre-inflation shock highs of over $298.

While NSC stock has little 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 Norfolk Southern vs. U Haul Holding.

With inflation rising and the Fed raising interest rates, among other factors, NSC stock has fallen 9% 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? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

[1] Month-to-date and year-to-date as of 6/16/2023
[2] Cumulative total returns since the end of 2016

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