Barclays Upgrades Norfolk Southern: 'Winter Is Coming'

• Shares of Norfolk Southern Corp. NSC are up 20 percent since September 8.
• Barcklays’ Brandon R. Oglenski upgraded the rating on the company from Underweight to Equal-weight, while raising the price target from $76 to $95.
• Management is under pressure to perform better and has for the first time outlined certain financial targets, Oglenski staed.

Norfolk Southern’s management team faces additional pressure to deliver improved margins, especially after its aggressive rejection of the merger offer by Canadian Pacific Railway Limited (USA) CP. This pressure is a positive catalyst in an otherwise challenged railroad segment, analyst Brandon Oglenski believes.

Oglenski expects Canadian Pacific to keep the pressure on Norfolk Southern for a deal. The latter’s management could have a short tenure unless they deliver a swift positive change.

Norfolk Southern’s new CEO has pledged the first ever financial targets, including expanding the Operating Ratio to below 65 and achieving double-digit EPS growth through 2020. Oglenski mentioned that the company’s new targets appear in-line with the improvement assumed by other carriers.

“If management can achieve a sub-65 OR, it would imply greater than 100bps of annual margin improvement, in line with other railroad guidance, but much lower than CP's gains of over 500bps on average in the past few years,” the Barclays report noted.

Oglenski believes that Norfolk Southern’s shareholders do understand Canadian Pacific’s more aggressive offer and will measure future results against that benchmark. He added that regardless of the outcome with Canadian Pacific, Norfolk Southern is poised for an improvement.