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Norfolk Southern (NSC) Stock Up 14% in 6 Months: Here’s Why


Shares of Norfolk Southern Corporation NSC have gained 13.8% in the past six months, outperforming the Zacks Rail industry’s rally of 10.2%.

Let’s take a look into the factors responsible for the impressive price performance and see if the company can add new feathers in its cap.

In January 2018, Norfolk Southern reported better-than-expected earnings per share and revenues for the fourth quarter of 2017. The metrics also improved on a year-over-year basis. Results were aided by volume growth owing to impressive performances at the key segments like coal, merchandise and intermodal.

Moreover, the company’s efforts to cut costs in order to drive its bottom line are impressive. Improvement in operating ratio (operating expenses as a percentage of revenues) is a positive as well. The metric has improved 150 basis points in 2017 on a year-over-year basis. Norfolk Southern aims to achieve an operating ratio of below 65% by 2020 or even earlier. Annual productivity savings in excess of $650 million are expected by 2020.

Additionally, the company’s focus on rewarding shareholders through share repurchases and dividends are encouraging. In keeping with the objective of rewarding shareholders, the company announced an 18% increase in its quarterly cash dividend to 72 cents per share (annualized $2.88 per share) in January. In fact, it has shelled out $703 million in dividends and repurchased shares worth $1 billion in 2017.

Apart from Norfolk Southern, fellow railroad operators like Union Pacific Corporation UNP and Canadian National Railway CNI have raised dividend payouts recently. Last year, Kansas City Southern KSU had hiked its quarterly dividend as well.

Furthermore, the new tax law (Tax Cuts and Jobs Act), which reduces corporate tax rate significantly, proved conducive for the company. Norfolk Southern expects effective tax rate to come down to around 24% from 35.4% recorded in 2017. The resultant savings is anticipated to increase the shareholder-friendly activities. Moving ahead, the company envisions intermodal and merchandise networks to drive growth.

Estimate Revisions & Zacks Rank

Upward estimate revisions reflect optimism about a stock’s prospects. Norfolk Southern scores impressively on this front too. In fact, this Zacks Rank #2 (Buy) company has seen the Zacks Consensus Estimate for current-quarter and yearly earnings being revised 13.5% and 16.3% upward, respectively, in the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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