On Monday, UBS upgraded the shares of Norfolk Southern Corp (NYSE:NSC) from Neutral to Buy, with a significant increase in the price target to $302 from the previous $238.
"We are upgrading NSC to Buy from Neutral because we expect stronger performance in NSC's merchandise network," said UBS.
The upgrade is based on the expectation that Norfolk Southern's merchandise business operating ratio (OR) could see a substantial improvement. UBS predicts that the OR could decrease by up to 1,000 basis points, moving from an estimated 65% in 2023 to 55% by 2026. This improvement is anticipated to result in a total company OR of 61% and earnings per share (EPS) of $16.55.
The firm believes that the consensus estimates for 2026, which currently stand at a 64.3% OR and $15.45 EPS, do not fully reflect the potential gains from the merchandise segment at Norfolk Southern. UBS suggests that as the operating ratio outperforms expectations, the stock is likely to benefit from positive earnings revisions and a re-rating of its multiple.
InvestingPro Insights
Following UBS's upgrade of Norfolk Southern Corp (NYSE:NSC), investors may find additional insights from InvestingPro valuable. Norfolk Southern has demonstrated a commitment to shareholder returns, having raised its dividend for 7 consecutive years and maintained dividend payments for 43 consecutive years, which can be seen as a sign of the company's financial health and management's confidence in its future prospects.
InvestingPro data shows that Norfolk Southern has a market capitalization of $58.16 billion and is trading at a high earnings multiple with a P/E ratio of 31.93, which may suggest investors are expecting future growth. The company's Price / Book ratio as of the last twelve months ending Q4 2023 stands at 4.55, indicating that the stock might be trading at a premium compared to its book value.
Despite a revenue decline of 4.62% over the last twelve months as of Q4 2023, analysts predict the company will be profitable this year, supported by a large price uptick of 26.38% over the last six months. This could signal market optimism about the company's future performance.
For those looking to delve deeper, there are additional InvestingPro Tips available, including earnings revisions by analysts and valuation multiples. With the unique promo code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription to access these insights and more. Visit InvestingPro to explore a total of 10 tips that could help in making more informed investment decisions.
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