Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Norfolk Southern Corporation (NYSE:NSC) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Norfolk Southern has a trailing twelve months PE ratio of 19.55. This level compares favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.04.
If we focus on the long-term trend of the stock the current level puts Norfolk Southern’s current PE near highs over the observed period. This suggests that the stock is overvalued compared to its own historical levels.
Further, the stock’s PE compares favorably with its industry’s trailing twelve months PE ratio, which stands at 20.27. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Norfolk Southern has a forward PE ratio (price relative to this year’s earnings) of 18.93 – lower than the current level. So, it is fair to say that a slightly more value-oriented path may be ahead for Norfolk Southern stock in the near term too.
PS Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Norfolk Southern has a P/S ratio of about 3.43. This is lower than the industry average, which comes in at 4.81x right now.
NSC is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Norfolk Southern currently has a Value Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Norfolk Southern an apt choice for value investors, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio (another great indicator of value) comes in at 12.13, which is slightly better than the industry average of 12.22. Furthermore, the EV/EBITDA for Norfolk Southern is 10.35, a level that is lower than the industry average of 10.9. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity.
Clearly, NSC is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Norfolk Southern might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘D’. This gives NSC a Zacks VGM score—or its overarching fundamental grade—of ‘C’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s earnings estimates have been mixed at best. The current quarter has seen one estimate go higher in the past sixty days compared to seven lower, while the full year estimate has seen four upward revisions and four downward revisions in the same time period.
This has had a small but meaningful impact on the consensus estimate though as the current quarter consensus estimate has decreased 3% over the past two months, while the full year estimate has inched up 0.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Norfolk Souther Corporation Price and Consensus
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Bottom Line
Norfolk Southern is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a formidable industry rank (Top 2% out of more than 250 industries) further supports the growth potential of the stock. In fact, over the past year, the respective industry has clearly outperformed the broader market, as you can see below:
Meanwhile, we are impressed by Norfolk Southern's efforts to reward investors through share buybacks and dividend payments. The company, which has paid dividends for 139 consecutive quarters, shelled out $700 million in dividends and repurchased shares worth $800 million in 2016.
Nevertheless, value investors might want to wait for the NSC’s price to correct downward a bit as well as estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
One Simple Trading Idea
Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.
This proven stock-picking system is grounded on a single big idea that can be fortune shaping and life changing. You can apply it to your portfolio starting today.
Norfolk Souther Corporation (NSC): Free Stock Analysis Report
Original post