Jefferies Initiates Coverage On Norfolk Southern With Buy Rating

Jefferies is initiating coverage of Norfolk Southern NSC with a Buy rating and price target of $74. The rails have grown EPS at a 13.5% CAGR for a decade, driving the shares higher at a 15% CAGR, yet they trade at only 14x earnings. While the market's clearly discovered the group, Jefferies thinks many investors underestimate the earnings trajectory that remains ahead — even after a massive contract repricing cycle. Real rail rates dropped from 100 cents on the dollar in 1980 to 40 cents in 2003. A continued cost-plus mentality resulted in all cost saves from productivity improvements post-deregulation going back to the shipper. Real rates bottomed mid-last decade, and could feasibly rise for another 10 years. The potential for volume growth from either an economic cycle or truckload conversion to intermodal is all upside. Total reported EPS CAGRs in the double digits seems feasible for years.