Argus Is Still Waiting For A Better Entry Point In Norfolk

Argus analysts, John Eade and Katelyn Bayone, are still waiting for an entry point in Norfolk Southern Corp.

shares. The two analysts have retained their rating of Hold on the company's shares though their long-term rating is a Buy. The brokerage cited that business trends have turned negative for the rail industry, and as a high-cost operator, Norfolk Southern has little ability to make a quick fix. Also, the retailer has relatively high exposure to the coal sector, and the outlook for coal remains bleak due to the low price of natural gas. The analysts pointed out NSC shares have underperformed industry peers over multiple periods and in their view offer value for the long term. In fact, the company's high cost structure could be attractive for a potential industry suitor looking to grow the top line while slashing costs. The stock also carries a dividend yield of about 2.7%, which Argus believes is attractive in a low interest rate environment. Therefore, Eade and Bayone rated the stock as Buy for the long-term. According to the two analysts, Norfolk Southern has three main operating segments: General Merchandise, which accounted for 54% of 1Q sales; Coal, 14%; and Intermodal, 22%. Its first resulted indicated that the Coal segment posted revenue of $349 million, down 23% from the same period a year earlier on a 23% decrease in volume (worse than the 18% volume decline in 4Q). Its Revenue per unit dipped 1% to $1,626. Within the division, utility coal volumes dropped 24 percent, which management attributed to unfavorable weather, as well as, high inventory stockpiles. Similarly, in the export market, the analysts pointed out that "volume fell 31%. Looking ahead, management expects coal segment revenue to continue to decline over the remainder of 2016 as stockpiles remain high. In the Intermodal segment, revenue fell 12% to $522 million. Volume was flat. Revenue per unit declined 12% to $562, driven by lower fuel surcharges. Excluding the impact of restructuring, revenue fell 1% and volumes rose 6%. The restructuring, focused on the company's Triple Crown truck/rail business, is expected to reduce volume and revenue this year, but to improve profitability." As far as the Merchandise segment, "revenue rose 2% to $1.55 billion, reflecting a 3% increase in volume, partly offset by a 1% decline in revenue per unit. Volume increases were mostly driven by the auto segment, which saw a gain of 18%." Similarly, in respect of valuation, the two analysts said that NSC shares appear fairly valued at current prices of nearly $84. The shares were trading above the midpoint of their 52-week range of $64-$99. From a technical standpoint, they have generally been in a bearish pattern of lower highs and lower lows that dates to November 2014. The brokerage said that the dividend yield of 2.7% is slightly above the historical average. Compared to the peer group, NSC's multiples are mixed, but generally on the low side. We think this is reasonable given the company's exposure to coal and its high cost structure. We would reconsider our rating in the event of a nonfundamental pullback to the mid-$70s. The stock traded 1.34 percent higher on Friday.