It’s time to delve into Norfolk Southern’s (NSC) financial performance. The company has encountered a rough patch since the pandemic, grappling with volatile freight demand and supply chain challenges, as well as general inflation in 2022. The major train derailment in East Palestine, Ohio, brought additional costs of hundreds of millions, including a hefty $600 million settlement for lawsuits. Another factor contributing to NSC’s difficulties is the ongoing proxy battle with Ancora Holdings.
In the first quarter of this year, Norfolk Southern’s financial results were impacted by several factors, including the $600 million settlement related to the Ohio derailment incident and other related costs. Adjusted results revealed a 4% decline in revenues and a 3% increase in operating expenses, leading to an 18% lower operating income.
Looking forward, Norfolk Southern anticipates a mixed macroeconomic environment, characterized by uncertainty regarding inflation and future Fed rate actions. Despite these challenges, the company believes it’s well-positioned to capitalize on growth opportunities due to its improving service product and ongoing infrastructure projects.
The new COO, John Orr, has taken steps to enhance NSC’s network, including removing approximately 200 locomotives from the fleet and increasing car miles by 8%. These efforts aim to improve efficiency and reduce the operating ratio.
The company’s valuation remains attractive, trading at a blended P/E ratio of around 20.8x, above its long-term normalized P/E multiple of 17.4x. Analysts are upbeat, forecasting 16% and 13% EPS growth in 2025 and 2026, respectively. If the company successfully achieves its targets, a 20x multiple would be warranted, paving the way for a $310 price target.
While NSC faces challenges, including operational issues and financial settlements, its potential for growth and current valuation make it a compelling investment. Analysts anticipate significant EPS growth in the coming years, and if NSC stays on track with its plans, long-term returns could potentially outperform the market.
