Norfolk Southern trades at $287.63 per share and has stayed right on track with the overall market, gaining 9.4% over the last six months. At the same time, the S&P 500 has returned 11.3%.
Is now the time to buy Norfolk Southern, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Norfolk Southern Will Underperform?
We're cautious about Norfolk Southern. Here are three reasons you should be careful with NSC and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Rail Transportation company because there’s a ceiling to what customers will pay.
Over the last two years, Norfolk Southern’s units sold averaged 3.2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Norfolk Southern’s unimpressive 6.1% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Norfolk Southern’s margin dropped by 9.5 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Norfolk Southern’s free cash flow margin for the trailing 12 months was 17.2%.
Final Judgment
Norfolk Southern doesn’t pass our quality test. That said, the stock currently trades at 23.4× forward P/E (or $287.63 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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