All Aboard Norfolk Southern

Down A Steep Grade
Norfolk Southern (NSC ) (NSC) had been on a fast track since 2003, racing from 24 to 57 in mid-May, 2006. But the fourth-largest U.S. railroad skidded when second-quarter operating earnings missed analysts' forecasts because of reduced tax credits. The stock fell 10%, to 41, on July 26. "The market's reaction was overdone," says Carl Birkelbach of Birkelbach Capital Management, which bought shares at 39.46. They have since edged up to 42.81. Trading at 12 times his 2007 profit forecast, Norfolk "is a heck of a bargain," says Birkelbach. The stock, he figures, should hit 54 in a year. Kevin Kirkeby of Standard & Poor's (MHP ) upgraded Norfolk from "hold" to "buy." Norfolk's volume growth, led by container and coal shipments, is expected to continue into 2007, he says, while better use of its assets should boost margins. Kirkeby sees Norfolk to earning $3.44 a share in 2006 and $3.91 in 2007, up from $3.11 in 2005. Thomas Wadewitz of JPMorgan Securities (JPM ) says Norfolk's valuation is "compelling" now that it's trading below its historical range of 11 to 15 times forward earnings.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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