Here is a look at how Norfolk Southern (NSC) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $117.09 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $75.69 |
| Value Based on 0% Growth | $44.37 |
| Market Implied Growth Rate | 4.16% |
| NCAV | -$60.14 |
| PEmg | 16.82 |
| Current Ratio | 1.07 |
| PB Ratio | 2.63 |
Balance Sheet – 9/30/2013
| Current Assets | $2,494,000,000 |
| Current Liabilities | $2,332,000,000 |
| Total Debt | $8,499,000,000 |
| Total Assets | $31,365,000,000 |
| Intangible Assets | $0 |
| Total Liabilities | $21,071,000,000 |
| Outstanding Shares | 308,910,000 |
Earnings Per Share – Diluted
| 2013 (estimate) | $5.83 |
| 2012 | $5.38 |
| 2011 | $5.55 |
| 2010 | $4.08 |
| 2009 | $2.82 |
| 2008 | $4.52 |
| 2007 | $3.68 |
| 2006 | $3.57 |
| 2005 | $3.11 |
| 2004 | $2.31 |
| 2003 | $1.05 |
| 2002 | $1.18 |
Earnings Per Share – Modern Graham (Calculating EPSmg)
| 2013 (estimate) | $5.22 |
| 2012 | $4.77 |
| 2011 | $4.35 |
| 2010 | $3.74 |
| 2009 | $3.56 |
| 2008 | $3.77 |
Conclusion:
Norfolk Southern appears to be a very solid company that should be on the watch list of all Defensive Investors and Enterprising Investors. The company passes all of the requirements of the Defensive Investor, except for the current ratio requirement. While the company doesn’t pass enough of the Enterprising Investor tests as we would like to normally see, since it is suitable for the Defensive Investor, it is by default also suitable for the Enterprising Investor. From a valuation perspective, the company has achieved solid growth recently, growing its EPSmg (normalized earnings) from $3.56 in 2009 to an estimated $5.22 for 2013. This level of growth supports a valuation above where the market is currently trading. As a result, Intelligent Investors should feel comfortable proceeding with further research to determine whether Norfolk Southern would be a good fit for their individual portfolios.
Disclaimer: The author did not hold a position in Norfolk Southern at the time of publication and had no intention of entering into a position within the next 72 hours.
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