Is CSX A Better Railroad Pick Over Norfolk Southern Stock?

Given its better valuation and prospects, we think CSX stock (NYSE: CSX) is a better pick than its peer – Norfolk Southern stock (NYSE: NSC). NSC stock trades at 21x forward expected earnings, versus 17x for CSX. We think this gap in valuation will narrow in favor of CSX over the coming years, given its superior revenue growth, profitability, as well as financial position. There is more to the comparison, and in the sections below, we discuss why we think CSX will outperform NSC in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of Norfolk Southern vs. CSX: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Norfolk Southern Stock Has Fared Better Than CSX

NSC stock has witnessed gains of 15% from levels of $220 in early January 2021 to around $250 now, slightly better than 10% gains for CSX stock, up from $30 to $33 over this period. This compares with the 45% gains for the S&P 500 over the same period.

Overall, the performance of these stocks with respect to the index has been far from consistent. Returns for NSC stock were 27% in 2021, -16% in 2022, and -2% in 2023, while returns for CSX stock were 26%, -17%, and 13%, respectively. 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 and CSX underperformed the S&P in 2021 and 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 GE, CAT, and UNP, 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.

2. CSX’s Revenue Growth Is Better

CSX’s top-line expansion has fared better than Norfolk Southern lately. While CSX’s revenue rose at an average annual rate of 11.9% from $10.6 billion in 2020 to $14.7 billion in 2023, Norfolk Southern’s sales grew at an average rate of 7.9% from $9.8 billion to $12.2 billion over the same period.

Norfolk Southern has seen softer volume growth lately, but it has benefited from a robust pricing environment clubbed with higher fuel surcharges. For perspective, Norfolk Southern’s total volume of carloads and intermodal units rose just 0.9% between 2020 and 2023, while its average revenue per carload or unit rose a solid 23%. Average revenue per unit for coal freight was up a solid 39% between 2020 and 2023, while intermodal was up 22% and merchandise up 14%.

CSX has benefited from strong pricing gains and higher fuel surcharge revenues over recent years. The company saw double-digit pricing gains across segments. While average revenue per unit rose 18% for merchandise and 19% for intermodal, it was up a significant 50% for coal freight over the last three years. Furthermore, the company saw a massive 3.6x rise in Trucking & Other revenues, primarily due to its 2021 acquisition of Quality Carriers – a trucking company focused on the bulk transportation of liquid chemicals.

Our Norfolk Southern Revenue Comparison and CSX Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, we think Norfolk Southern will see its top-line expand at a low single-digit average annual rate, due to a weakening consumer sentiment, while volume growth remains soft. A weakening of coal export pricing lately is also hurting the top-line growth for railroad companies at large. With CSX’s exposure to the trucking business and higher reliance on merchandise freight, we think it will see better revenue growth in the coming years.

3. CSX Is More Profitable 

Norfolk Southern’s operating margin declined from 37.4% in 2020 to 35.2% in 2023, while CSX’s operating margin has contracted from 41.3% to 37.9% over this period. Note that Norfolk Southern took a $1.2 billion charge in the first half of 2023 related to the Ohio train derailment incident, resulting in operating margin contraction. Furthermore, an overall increase in labor costs since the pandemic and higher fuel prices have weighed on the margin profile lately. Looking at the last twelve month period, CSX’s operating margin of 37.1% fares better than 34.4% for Norfolk Southern.

4. CSX Fares Better In Terms of Financial Risk

Looking at financial risk, we believe CSX has a slight edge over Norfolk Southern. Its 29% debt as a percentage of equity is marginally lower than 30% for Norfolk Southern. Also, its 3% cash as a percentage of assets is higher than 1% for the latter. This implies that CSX has a better debt position and more cash cushion.

5. The Net of It All

We see that CSX has seen better revenue growth, is more profitable, and has more cash cushion. Now, looking at the prospects, we believe CSX is the better choice of the two. At its current levels, CSX stock is trading at 17x its expected earnings of $1.94 per share in 2024. The 17x figure is slightly below the stock’s average P/E ratio of 18x over the last five years. In comparison, Norfolk Southern stock is trading at 21x its expected earnings of $11.76 in 2024. The 21x figure is slightly below the stock’s average P/E ratio of 23x over the last five years. While this implies that both stocks have some room to grow, we believe CSX will fare better with its superior expected revenue growth and its valuation multiple trending higher.

While CSX may outperform NSC in the next three years, 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 9/9/2024
[2] Cumulative total returns since the end of 2016

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