Trinity Industries, Inc. (NYSE:TRN) shares are up more than 18.19% this year and recently increased 0.71% or $0.23 to settle at $32.81. Norfolk Southern Corporation (NYSE:NSC), on the other hand, is up 18.09% year to date as of 11/13/2017. It currently trades at $127.62 and has returned -1.92% during the past week.
Trinity Industries, Inc. (NYSE:TRN) and Norfolk Southern Corporation (NYSE:NSC) 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 TRN to grow earnings at a 10.00% annual rate over the next 5 years. Comparatively, NSC is expected to grow at a 12.17% annual rate. All else equal, NSC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 43.49% for Norfolk Southern Corporation (NSC). TRN’s ROI is 7.70% while NSC has a ROI of 9.50%. The interpretation is that NSC’s business generates a higher return on investment than TRN’s.
Cash is king when it comes to investing. TRN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.17. Comparatively, NSC’s free cash flow per share was +0.97. On a percent-of-sales basis, TRN’s free cash flow was 0.56% while NSC converted 2.81% 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
TRN’s debt-to-equity ratio is 0.82 versus a D/E of 0.78 for NSC. TRN is therefore the more solvent of the two companies, and has lower financial risk.
TRN trades at a forward P/E of 27.23, a P/B of 1.22, and a P/S of 1.28, compared to a forward P/E of 17.98, a P/B of 2.88, and a P/S of 3.54 for NSC. 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. TRN is currently priced at a -6.02% to its one-year price target of 34.91. Comparatively, NSC is -4.4% relative to its price target of 133.50. This suggests that TRN 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 2.10 for TRN and 2.60 for NSC, which implies that analysts are more bullish on the outlook for NSC.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. TRN has a beta of 2.24 and NSC’s beta is 1.35. 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. TRN has a short ratio of 7.13 compared to a short interest of 2.50 for NSC. This implies that the market is currently less bearish on the outlook for NSC.
Norfolk Southern Corporation (NYSE:NSC) beats Trinity Industries, Inc. (NYSE:TRN) on a total of 10 of the 14 factors compared between the two stocks. NSC , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, NSC has better sentiment signals based on short interest.