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Choosing Between Norfolk Southern Corporation (NSC) and AVEO Pharmaceuticals, Inc. (AVEO)

Norfolk Southern Corporation (NYSE:NSC) shares are up more than 6.40% this year and recently decreased -1.35% or -$2.11 to settle at $154.17. AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO), on the other hand, is down -21.86% year to date as of 06/13/2018. It currently trades at $2.18 and has returned -3.54% during the past week.

Norfolk Southern Corporation (NYSE:NSC) and AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) are the two most active stocks in the Railroads industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect NSC to grow earnings at a 15.04% annual rate over the next 5 years.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Norfolk Southern Corporation (NSC) has an EBITDA margin of 44.84%. This suggests that NSC underlying business is more profitable NSC’s ROI is 9.60% while AVEO has a ROI of 129.70%. The interpretation is that AVEO’s business generates a higher return on investment than NSC’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. NSC’s free cash flow (“FCF”) per share for the trailing twelve months was +0.80. Comparatively, AVEO’s free cash flow per share was -0.05. On a percent-of-sales basis, NSC’s free cash flow was 2.14% while AVEO converted -0.08% of its revenues into cash flow. This means that, for a given level of sales, NSC is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. NSC has a current ratio of 1.00 compared to 1.30 for AVEO. This means that AVEO can more easily cover its most immediate liabilities over the next twelve months.

Valuation

NSC trades at a forward P/E of 16.14, a P/B of 2.66, and a P/S of 4.09, compared to a P/S of 42.29 for AVEO. NSC is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. 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 -2.15% to its one-year price target of 157.55. Comparatively, AVEO is -61.55% relative to its price target of 5.67. This suggests that AVEO is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. NSC has a beta of 1.28 and AVEO’s beta is 1.49. NSC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. NSC has a short ratio of 3.62 compared to a short interest of 6.31 for AVEO. This implies that the market is currently less bearish on the outlook for NSC.

Summary

AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO) beats Norfolk Southern Corporation (NYSE:NSC) on a total of 7 of the 14 factors compared between the two stocks. AVEO is growing fastly, higher liquidity and has lower financial risk. In terms of valuation, AVEO is the cheaper of the two stocks on an earnings and book value, AVEO is more undervalued relative to its price target. Finally, PIR has better sentiment signals based on short interest.

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