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Norfolk Southern (NSC) Hits 52-Week High with Room to Run


Norfolk Southern Corporation NSC stock with its 40.1% rise in a year’s time compared with roughly 30% growth recorded by its industry, is clearly on a tear.

One-Year Price Performance

While shares of this Norfolk, VA-based railroad operator have run up considerably and reached their highest level in a year on Sep 8, 2018, there is still reason to add the stock to your portfolio. It looks promising and poised to carry the momentum ahead.

Let’s take a look into the factors why we believe that this Zacks Rank #2 (Buy) stock has further scope for upside going forward.

Robust Earnings Growth Expectations: The Zacks Consensus Estimate for earnings for third-quarter 2018 for Norfolk Southern is currently pegged at $2.43, reflecting expected year-over-year growth of 38.9%. Current-year earnings are also expected to grow more than 38% on a year-over-year basis.

Rising Earnings Estimates: The Zacks Consensus Estimate for current-year earnings has been revised upward to the tune of 7.1% over the last 60 days. Similarly, the Zacks Consensus Estimate for 2018 and 2019 earnings have increased 5.4% and 4.3%, respectively, in the same timeframe. The favorable estimate revisions reflect the confidence of brokers in the stock.

Given the wealth of information at their disposal, it is in the best interest of investors to be guided by broker advice and the direction of their estimate revisions. This is because the direction of estimate revisions serves as an important pointer when it comes to the price of a stock.

Strong Revenue Growth: The 2018 Zacks Consensus Estimate for this railroad operator is $11.36 billion, representing 7.7% revenue growth over 2017. Next year’s average forecast is $11.43 billion, pointing to 4.1% year-over-year growth.

Shareholder-Friendly Attitude: We are impressed by the company’s focus on rewarding shareholders through share repurchases and dividends. The company rewarded its shareholders to the tune of $1.1 billion in the first half of 2018 through dividends ($408 million) and buybacks ($700 million). In July 2018, the company increased its quarterly dividend by 11% to 80 cents a share. This is the second dividend hike by the company this year.

In the first quarter, the company had hiked its dividend by 18% to 72 cents a share. Combining the latest hike, the company has increased its dividend by 29% this year so far. The hikes underscore its strong financial condition and bright prospects. Also, a look at the past records reveal that the company has a stable dividend payment history.

Volume Growth and Cost Cuts: Volume growth is aiding Norfolk Southern immensely. Volumes have increased 4% in the first half of the year on the back of impressive performances at its key divisions. Volume growth is expected to continue through the remainder of the year. In fact, at the recently held Cowen and Company 11th Annual Global Transportation Conference, the company stated that third-quarter overall volumes were up 5.7% year over year as of Sep 1.

Norfolk Southern is making constant efforts to streamline its operations in order to increase productivity. The company is looking to cut costs in order to drive the bottom line. The improvement in operating ratio (operating expenses as a percentage of revenues) this year is a positive. The metric has improved 170 basis points on a year-over-year basis in the second quarter of 2018. The company aims to achieve an operating ratio of below 65% by 2020 or even earlier.

Bullish Industry Rank: The industry, to which Norfolk Southern belongs, currently has a Zacks Industry Rank of 51 (out of 250 plus groups). The favorable rank places the companies in the top 20% of the Zacks industries. Studies have shown that 50% of a stock's price movement is directly tied to the performance of the industry group that it is in. In fact, an average stock in a strong group is likely to outperform a great stock in a poor industry. Therefore, taking the industry’s performance into account becomes necessary.

Other Stocks to Consider

Investors interested in the broader Transportation sector are Landstar System, Inc. LSTR, SkyWest, Inc. SKYW and Trinity Industries, Inc. TRN. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Landstar System, SkyWest and Trinity have rallied more than 29%, 62% and 20%, respectively, in a year’s time.

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