According to Scott Group analyst at Wolfe Research, shares of Norfolk Southern Corp. has fallen enough – when compared with the shares of other rail operators and the broader stock market – to provide an “attractive entry point” for investors.
The Group has upgraded its rating on Norfolk Southern stock to outperform its peer-to-peer performance. His stock price target of $255 implies a gain of about 14% from current levels.
Norfolk South of
The stock fell 2% in Tuesday afternoon trading, taking it to its lowest close since October 27, 2022.
It has dropped 11.3% since February 3, when a Norfolk Southern freight train derailed in East Palestine, Ohio, leading to release harmful chemicals. The company has faced criticism from the public and regulators since then, which appears to have increased since the company announced a fund for the affected community. only 1 million USD.
Shares of rival CSX Corp.
and Union Pacific Corp.
also fell 4.9% and 7.6%, respectively, while the S&P 500
lost 3.3% in the same time period.
There are several reasons behind the Group’s bullish trend. First, he noted that Norfolk Southern has third-party bodily injury and property damage insurance that provides coverage over $75 million and under $800 million.
“Without loss of life, we see no realistic possibility that this accident would exceed $800 million in total liability, so we consider maximum liability for [Norfolk Southern] worth $75 million,” the Group wrote in a note to clients.
Meanwhile, the stock’s underperformance relative to its peers equates to about $3.4 billion in lost market capitalization, the Group said, compared with a maximum potential one-time debt of $3.4 billion. 75 million dollars.
“Therefore, in our view, this sell-off appears to have been overdone,” the Group wrote.
Additionally, the Group said he is modeling an operating rate for Norfolk Southern of 62.4% for 2023, which he says is “the worst of the rails”. Operational Rate (OR) is a measure of efficiency for railways, so the lower the ratio, the better.
Norfolk’s projected OR versus 2022 OR for CSX is 59.5% and for Union Pacific is 60.1%.
“In the past, we had a very simple argument that owning the railroad had the worst OR, had the most room to catch profits, and therefore [earnings-per-share] growth,” wrote the Group. “[A]and in those rare cases when the rails have the worst conditions OR are also trading at the lowest valuations, the stock’s outperformance is even more important.”
Now, with Norfolk Southern’s stock trading at the lowest valuation, the Group sees “a more attractive entry point” for investors.
And while there is legal risk emerging following the Ohio derailment, the Group said it is a problem for all railroads, not just Norfolk Southern.