I Anticipate That Operational Improvements And Intermodal Expansion Will Drive Future Market Share Gains

Key Takeaways

• Operational improvements in efficiency and safety could reduce costs and expand margins, supporting potential earnings growth.
  
• Strategic growth in intermodal and industrial markets, along with share repurchases, suggests enhanced revenue and EPS.
  
• Norfolk Southern faces revenue challenges from potential tariffs, bearish coal markets, intermodal rate pressure, external disruptions, and inflationary headwinds impacting net earnings growth.

Catalysts

Engages in the rail transportation of raw materials, intermediate products, and finished goods in the United States.

• Norfolk Southern's operating improvements, including increased train velocity and efficiency, have allowed for cost reductions and better asset utilization, potentially boosting net margins in the future.
  
• The company's focus on productivity and safety enhancements reduces operational disruptions, potentially leading to lower expense ratios and contributing to margin expansion.
  
• The implementation of a refined operating plan (PSR 2.0) aims to optimize asset and crew utilization, which could result in increased operating leverage and improved earnings.
  
• Intermodal growth and a robust industrial development pipeline suggest potential revenue growth, driven by recapture of market share and expansion in key markets.
  
• Norfolk Southern's commitment to share repurchases, facilitated by improved balance sheet strength, could enhance earnings per share (EPS) through capital return to shareholders.

Norfolk Southern Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Norfolk Southern's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.8% today to 25.5% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $16.3) by about January 2028, up from $2.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, down from 23.7x today. This future PE is lower than the current PE for the US Transportation industry at 29.9x.
• Analysts expect the number of shares outstanding to decline by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Norfolk Southern Future Earnings Per Share Growth

Risks

• The potential for new tariffs introduces uncertainty in multiple markets served by Norfolk Southern, which may negatively affect revenue if trade dynamics change or lead to decreased demand.
  
• A bearish outlook for coal markets, driven by declining seaborne prices and reduced domestic utility demand, poses a risk to revenue, exacerbated by fluctuations in natural gas prices.
  
• Continued rate pressure within intermodal and coal sectors, as well as lower fuel surcharge revenue, might challenge the company’s ability to maintain revenue growth.
  
• Operational improvements could be limited by external factors such as port stoppages and natural disasters, which may require additional resources and disrupt efficient service, impacting net margins.
  
• There are significant headwinds expected from inflation, fuel price increases, and depreciation, which could offset cost savings and negatively impact net earnings growth.

Valuation

• The analysts have a consensus price target of $272.84 for Norfolk Southern based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $309.0, and the most bearish reporting a price target of just $175.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.8 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $252.32, the analyst's price target of $272.84 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.