Norfolk Southern Corporation (NYSE:NSC) shares are down more than -3.44% this year and recently increased 1.22% or $1.69 to settle at $139.91. Kansas City Southern (NYSE:KSU), on the other hand, is up 0.19% year to date as of 02/12/2018. It currently trades at $105.42 and has returned 0.23% during the past week.
Norfolk Southern Corporation (NYSE:NSC) and Kansas City Southern (NYSE:KSU) are the two most active stocks in the Railroads industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect NSC to grow earnings at a 15.46% annual rate over the next 5 years. Comparatively, KSU is expected to grow at a 15.68% annual rate. All else equal, KSU’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 50.15% for Kansas City Southern (KSU). NSC’s ROI is 22.40% while KSU has a ROI of 14.10%. The interpretation is that NSC’s business generates a higher return on investment than KSU’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. NSC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.72. Comparatively, KSU’s free cash flow per share was +1.15. On a percent-of-sales basis, NSC’s free cash flow was 1.94% while KSU converted 4.59% of its revenues into cash flow. This means that, for a given level of sales, KSU is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. NSC has a current ratio of 0.80 compared to 0.70 for KSU. This means that NSC can more easily cover its most immediate liabilities over the next twelve months. NSC’s debt-to-equity ratio is 0.60 versus a D/E of 0.58 for KSU. NSC is therefore the more solvent of the two companies, and has lower financial risk.
NSC trades at a forward P/E of 14.82, a P/B of 2.44, and a P/S of 3.76, compared to a forward P/E of 14.86, a P/B of 2.39, and a P/S of 4.20 for KSU. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. NSC is currently priced at a -11.98% to its one-year price target of 158.95. Comparatively, KSU is -11.78% relative to its price target of 119.50. This suggests that NSC is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for NSC and 2.40 for KSU, which implies that analysts are more bullish on the outlook for NSC.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. NSC has a beta of 1.25 and KSU’s beta is 0.85. KSU’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NSC has a short ratio of 2.65 compared to a short interest of 2.57 for KSU. This implies that the market is currently less bearish on the outlook for KSU.
Kansas City Southern (NYSE:KSU) beats Norfolk Southern Corporation (NYSE:NSC) on a total of 9 of the 14 factors compared between the two stocks. KSU generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, KSU has better sentiment signals based on short interest.