Is Norfolk Southern the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Norfolk Southern (NYSE: NSC  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Norfolk Southern.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.2% Fail
  1-Year Revenue Growth > 12% 19.8% Pass
Margins Gross Margin > 35% 35.8% Pass
  Net Margin > 15% 15.8% Pass
Balance Sheet Debt to Equity < 50% 63.7% Fail
  Current Ratio > 1.3 1.17 Fail
Opportunities Return on Equity > 15% 14.8% Fail
Valuation Normalized P/E < 20 18.44 Pass
Dividends Current Yield > 2% 2.1% Pass
  5-Year Dividend Growth > 10% 22.5% Pass
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With six points, Norfolk Southern is giving investors a pretty smooth ride. The economic recovery has helped the railroad industry, and with energy prices on the rise, efficiencies from rail transportation have come back into vogue.

Few sectors are more dependent on the health of the global economy than transportation stocks, and railroads in particular rely on strong levels of long-distance commerce. Despite what many see as a sluggish recovery, both Norfolk Southern and rivals CSX (NYSE: CSX  ) and Canadian National Railway (NYSE: CNI  ) have posted excellent earnings results recently. With high volumes of coal moving toward use in China's expansion, Norfolk Southern has been well-placed to benefit from the global recovery.

But Norfolk Southern doesn't just have coal to thank for its rebound. As the primary railroad hauler for FedEx, Norfolk Southern saw strong performance for its intermodal freight network as well. That strength has come largely from so-called "truckload diversions," as shippers have switched from road-based transportation to trains. That's bad news for trucking companies YRC Worldwide (Nasdaq: YRCW  ) and Arkansas Best, but it demonstrates the cyclical nature of transportation and energy prices.

Norfolk Southern shares aren't as cheap as they were a year or two ago, but they're still reasonably priced and carry a decent dividend. If the recovery continues at this pace, then the railroad could chug its way even closer to perfection in the future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Norfolk Southern to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Canadian National Railway and FedEx are Motley Fool Stock Advisor recommendations. The Fool owns shares of FedEx. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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