What’s Next For Norfolk Southern Stock After A Q2 Earnings Beat?

Norfolk Southern (NYSE: NSC) recently reported its Q2 results, with revenues missing but earnings comfortably above our estimates. The company reported revenue of $3.04 billion and earnings of $3.25 per share, compared to our estimates of $3.07 billion and $2.90, respectively. In this note, we discuss Norfolk Southern’s stock performance, key takeaways from its recent results, and valuation.

NSC stock has seen little change, moving from levels of $240 in early January 2021 to around $250 now, vs. an increase of about 45% for the S&P 500 over this period. However, the increase in NSC stock has been far from consistent. Returns for the stock were 27% in 2021, -16% in 2022, and -2% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that NSC underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including CAT and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NSC face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, NSC stock looks like it has some room for growth. We estimate Norfolk Southern’s Valuation to be $275 per share, reflecting around 10% upside from its current levels of $250. This represents a 23x P/E multiple for NSC based on earnings expectation of $11.76 for the full year 2024. The 23x figure aligns with the stock’s average P/E ratio over the last four years.

Norfolk Southern’s revenue of $3.04 billion in Q2 was up 2% y-o-y, primarily due to a 4.3% rise in Merchandise revenues. Looking at other segments, coal freight was down 2.7% and Intermodal was down 0.4% y-o-y. Norfolk Southern reported a 5% rise in overall volume shipped, but this was partly offset by a 3% decline in average revenue per unit. A rebound in volume shipped is a positive for the company. The company’s adjusted operating ratio stood at 65.1% in Q2’24 versus 66.7% in the prior-year quarter. However, the company expects its full-year 2024 operating ratio of around 66%. Norfolk Southern reported adjusted earnings of $3.06 per share in Q2’24, reflecting a 4% y-o-y rise.

Looking forward, with a rebound in volume growth and stable operating ratio, the company will likely see a robust earnings growth in the coming quarters. The Q2 earnings beat boded well with the investors, and the stock surged around 10% in the last five days. Still, we think NSC stock seems to have more upside.

While NSC stock may see higher levels, in our view, 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.

[1] Returns as of 7/29/2024
[2] Cumulative total returns since the end of 2016

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