Railroads are economic bellwethers in the 21st century, just as they were during America’s era of industrial and territorial expansion in the 19th century. As the U.S. recovery remains on track and gathers speed, Norfolk Southern (NYSE:NSC) should experience outsized growth in 2015.
Based in Norfolk, Virginia, Norfolk Southern operates a sprawling 20,000-mile network of tracks throughout 22 states and the District of Columbia.
Norfolk Southern provides vital access to coastal ports and is the go-to railroad for the coal mines of Appalachia, where it has exerted dominance for generations. The company also operates scheduled passenger trains.
Norfolk Southern announced fourth-quarter and full-year 2014 operating results before the markets opened this morning, and the results bode well for NSC stock.
Fourth-quarter earnings came in at $511 million, slightly down from earnings of $513 million in the same quarter a year ago. Earnings per share (EPS) in the quarter remained flat year-over-year, at $1.64.
The small earnings decline mostly stemmed from lower coal volume, as many facilities continue to transition away from coal and toward cleaner alternatives. However, for the full year, earnings reached a record $2 billion — a year-over-year increase of 5%. EPS for 2014 hit a record $6.39, up 6% compared to 2013.
Significantly, full-year intermodal revenue in 2014 shot up 7% to $2.6 billion, underscoring the railroad’s wisdom in emphasizing intermodal transportation when it was an emerging innovation. Intermodal shipping is increasingly popular with railroad customers because it allows the use of standardized containers that can be loaded onto trains, trucks and ocean-faring vessels.
NSC’s operating ratio for the year was a record 69.2%, a year-over-year improvement of 3%. Management also announced that it planned to plow $2.4 billion in capital investments in 2015, to enhance the safety and efficiency of NSC’s rail network and expand into growth markets.
NSC Stock: On Track in 2015
In the mid-1800s, railroads were the revolutionary technology of their day and railroad stocks were hot commodities. And today, despite the advent of jet airplanes, trucks and the Internet, railroads remain a vital transportation tool and railroad stocks still make good long-term investments.
Norfolk Southern benefits from recovery because it’s indispensable to the transportation of raw materials, intermediate products and finished goods for a host of industries that are in resurgence, especially automobile manufacturing and construction. However, NSC stock is particularly appealing now because the company is one of the best-managed and cost-efficient railroads in the United States. In today’s overbought stock market, NSC shares also represent a good value.
Economic growth is fuel for Norfolk Southern, and yet NSC stock trades at a trailing price-to-earnings (P/E) ratio of only 16.5, compared to the railroad industry’s P/E of 23.4. However, any concerns about declining coal volumes are overwrought and should be more than counterbalanced by continuing growth in intermodal shipments and demand from manufacturing.
Cyclical transportation plays can be vulnerable to economic and market vicissitudes, but NSC stock should stay firmly on the rails despite any turbulence in coming months.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
