CSX - Norfolk Southern: On Track For Long-Term Outperformance But Shares Are Fairly Valued (Downgrade)

2024-05-01 04:40:53 ET

Summary

• Norfolk Southern's Q1 results were lacklustre due to the impact one-off costs and a lack of top-line growth had on net income.
• Nevertheless, much of Norfolk's revenue weakness is tied to a soft macroeconomic environment rather than inherent business weaknesses at the railroad.
• Norfolk still faces risk from market cyclicality, operational safety issues, and competition from other railroads and trucking.
• The stock is currently trading at a fair valuation with a bear-case model, implying a slight overvaluation in shares.
• Hold rating issued.

Investment Thesis

Norfolk Southern ( NSC ) had a tough start to FY24 with their most recent Q1 results seeing the railroad generate lacklustre returns from their operations.

While significant one-off costs associated with the mediation for a derailment that occurred in 2023 placed a real damper on net income, Norfolk also struggled to control operating costs all the while revenues contracted slightly YoY.

This has degraded the value proposition of the railroad's stock with shares currently trading at essentially a fair valuation according to my intrinsic value calculation....

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