We issued an updated research report on Norfolk Southern CorporationNSC on Dec 26. While volume growth buoy optimism on the stock, issues like escalated debt levels raise concerns.
Let's discuss in details the factors influencing the company's performance.
Norfolk Southern is gaining momentum on the back of impressive performances at its key divisions, which in turn, are providing a boost to overall volumes. Notably, volumes have increased 5% in the first nine months of the year. Results in the final quarter of 2018 are anticipated to be driven by strong volumes. Meanwhile, bottom-line growth is being aided by a low effective tax rate.
The company's efforts to reward its shareholders through dividends and share buybacks are an added positive. In the first nine months of 2018, Norfolk Southern rewarded its shareholders to the tune of $2.9 billion through dividends ($627 million) and buybacks ($2,300 million). It generated free cash flow worth $1.6 billion in the period. In July 2018, the company increased its quarterly dividend by 11% to 80 cents a share. This is the second dividend hike by the company this year. In the first quarter, it had hiked dividend by 18% to 72 cents a share.
Combining the latest hike, Norfolk Southern has raised dividend by 29% this year so far. The hikes underscore its strong financial condition and bright prospects.
Furthermore, the operating ratio (operating expenses as a percentage of revenues) improved significantly. This key metric has improved for 11 consecutive quarters and is expected to do so in the final quarter of 2018 as well. Lower the value of the metric the better.
A glimpse of this Zacks Rank #3 (Hold) company's price performance reveals that it has outperformed the industry on a year-to-date basis. The stock has gained 2.8% against its industry 1.4% decline.
YTD Price Performance
However, Norfolk Southern's automotive division's dismal performance is concerning. The unit has been performing disappointingly for quite some time and the situation is unlikely to improve dramatically in the near future. Automotive volumes, down 4% in the first nine months of 2018, are suffering due to sluggish vehicle production in the United States.
The rise in operating expenses due to costs related to overall lower network velocity also bother us. We are concerned about the company's high debt levels as well.
Stocks to Consider
Investors interested in the Zacks Transportation Sector may consider Air France-KLM SA AFLYY , Spirit Airlines SAVE and Frontline Ltd. FRO , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Shares of Air France and Spirit Airlines have gained 26% and 57%, respectively, in the past six months. Meanwhile, Frontline stock boasts an impressive earnings history, having outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the average being 69%.
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