UBS Hikes Norfolk Southern To Buy, Thinks Company Can Deliver

Norfolk Southern Corp. NSC reported its Q1 results, with the EPS significantly above the consensus and the estimate.

UBS’ Thomas Wadewitz upgraded the rating on the company from Neutral to Buy, while raising the price target from $84 to $102.

Significant Opportunity

Wadewitz believes “the strong report amid a challenging revenue environment shows that NSC has the ability to deliver on its restructuring / operating improvement program and drive EPS growth.”

The analyst pointed out that although Norfolk Southern’s operating ratio has lagged that of its rail peers for several years, and while coal has been a greater headwind for the company for the past four years, “opportunity to drive EPS growth through OR improvement is significant.”

Wadewitz mentioned that applying a 65 percent OR to the company’s 2015 revenue base adds almost $800 million to the operating income, representing 28 percent growth.

“NSC faces easier headcount and fuel comparisons vs the rail group which supports 2016 performance,” the analyst noted.

Risk

Wadewitz believes the greatest risk facing Norfolk Southern’s volume performance is weak rail markets.

According to the UBS report, while the impact of coal has been “modestly less worse compared to the other large US rails in 2016,” Norfolk Southern “generally faces similar pressures from considerable weakness in coal, oil related, and segments that have seen pressure from the strong USD.”

The EPS estimate for 2017 has been raised significantly.