Why Norfolk Southern Corp. Stock Is Chugging Along Today

Textron’s fourth-quarter report shocked the street.

Jan 22, 2014 at 2:53PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of railroad company Norfolk Southern (NYSE:NSC) are riding on the right track today, rising as much as 6.8% following the release of its record fourth-quarter and full-year results.

So what: Norfolk easily topped analyst expectations for sales of $2.85 billion and earnings per share of $1.50 -- the company even beat the highest earnings-per-share estimate of $1.60. Norfolk reported that sales hopped up 7% to $2.9 billion, income from railway operations jumped 23% to $881 million, net income leaped 24% to $531 million, and diluted earnings per share soared 26% to $1.64. Following the news, Norfolk rallied to new all-time highs.

CEO Wick Moorman gave the credit to his "team of safety and service-oriented employees." He added, "We're seeing the results of our investments in network capacity and technology enhance our ability to offer superior service to all of our customers." The company plans to invest 12% more this year compared to 2013 in order to grow profitability even further.

During the conference call, chief marketing officer Donald Seale pointed out that Norfolk will "employ market-based pricing that equals or exceed rail inflation." This sounds like a fancy way of saying that the company will raise prices faster than regular market rates, implying that Norfolk has a pricing power that is above-average which could lead to more earnings beats down the road. All other things being equal, each dollar increase in sales goes straight to the company's bottom line.

Seale began the Q&A session by reassuring investors who were worried about the bad weather. The company saw a large decline in business during the first two weeks of the year but was quick to point out that such volumes only get deferred during times of bad weather and are made up for at a later time. During the third week of January, for example, Norfolk made up for almost all of the business lost to inclement weather.

Now what:  Taking it all in, Norfolk seems unstoppable. With the 9.3% earnings-per-share beat and the optimistic outlook, analysts will likely raise their 2014 estimates, which currently stand at $6.39 per share. If estimates are raised in line with the 9.3% beat, you could see estimates go up to $7.00 per share. That would put Norfolk at a 2014 P/E of 13. Given its history of long-term steady growth, and the fact that it isn't shy about returning value to shareholders in the form of dividends, and Norfolk appears to be cheap for the long term.

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