Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Norfolk Southern (NYSE:NSC) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Norfolk's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Norfolk's key statistics:

NSC Total Return Price Chart

NSC Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

33%

Pass

Improving profit margin

20.8%

Pass

Free cash flow growth > Net income growth

(37.6%) vs. 60.6%

Fail

Improving EPS

86.7%

Pass

Stock growth (+ 15%) < EPS growth

42.80% vs. 86.7%

Pass

Source: YCharts. * Period begins at end of Q1 2010.

NSC Return on Equity Chart

NSC Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

64.9%

Pass

Declining debt to equity

26.2%

Fail

Dividend growth > 25%

47.1%

Pass

Free cash flow payout ratio < 50%

105.4%

Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
Norfolk chugs along with a strong performance, earning six out of nine possible passing grades. A large amount of long-term debt, raised between 2008 and 2012, has cost it on the debt-to-equity analysis. Norfolk also endured a substantial decline in free cash flow, to the point where virtually all of its free cash is being spent on dividend payments. However, Norfolk has beaten the Street with 25% gains this year alone. Let's dig a little deeper to find out what Norfolk is doing to maintain or grow its position.

Norfolk's revenue and net income have seen a steady rise over the last four years, but lots of money has been spent to upgrade rail infrastructure. Four corridors have seen improvements, while a new terminal has been built in Knoxville. This build-out has a long-term aim at cost savings -- the company aims to save more than $100 million in expenses this year.

In the second quarter, Norfolk reported a 2% increase in year-over-year volume. The rise was driven primarily by the chemicals (11%), intermodal (10%), and automotive (2%) segments. Coal has not been good to Norfolk, but agriculture and metals have also slowed. The moderate cuts on these segments represent a direct market-share gain for major rivals Canadian National Railway and CSX Corp. While Norfolk has some exposure to oil in Pennsylvania and Ohio, the firm is also benefiting from America's economic recovery, despite reducing its exposure to the coal segment. Norfolk's earnings declined by 8.7% year-over-year due to lower coal shipments, which comprised 20% of its 2012 revenues.

In recent years, oil production has boomed in the United States due to high crude oil prices and advancements in extraction technologies. While pipelines are one method to transport oil, rail has also benefited enormously, as there have been ready railroads near new-producing regions, but no operational pipelines. This shift is a boon for Norfolk, which operates a 20,000-mile railway network, most of which is east of the Mississippi, and runs nearly the entire length of the United States from north to south. Norfolk also has a partnership with Berkshire Hathaway's BNSF railroad that connects Norfolk's eastern operations with BNSF's West Coast dominance. Norfolk also serves every major container port across the East Coast.

Norfolk expects continued growth across its chemicals and intermodal segments throughout 2013. Chemicals are in high demand, largely due to rising crude oil production in North America, which continues to surpass current pipeline capacity. Moreover, the shale gas boom is driving the U.S. chemicals sector, which is resulting in higher shipments of industrial chemicals and plastics. Fueled by truck to rail conversions and Norfolk's investments in its Crescent Corridor program, intermodal business will be a key growth driver for Norfolk in the future.

The coal market, which represents a major headwind for Norfolk, could see a recovery should natural gas prices rise further in the future. The continuation of this trend could lead utilities to switch back to coal for electricity production. Norfolk must continue to focus on productivity initiatives through network right-sizing, higher velocity, and improvements in technology, engineering, and processes.

Putting the pieces together
Today, Norfolk has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Canadian National Railway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.