Stock Analysis on Net

Norfolk Southern Corp. (NYSE:NSC)

This company has been moved to the archive! The financial data has not been updated since April 27, 2022.

Present Value of Free Cash Flow to Equity (FCFE)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

Norfolk Southern Corp., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 17.05%
01 FCFE0 4,036
1 FCFE1 4,614 = 4,036 × (1 + 14.33%) 3,942
2 FCFE2 5,225 = 4,614 × (1 + 13.24%) 3,814
3 FCFE3 5,860 = 5,225 × (1 + 12.14%) 3,654
4 FCFE4 6,507 = 5,860 × (1 + 11.05%) 3,467
5 FCFE5 7,155 = 6,507 × (1 + 9.96%) 3,257
5 Terminal value (TV5) 110,921 = 7,155 × (1 + 9.96%) ÷ (17.05%9.96%) 50,490
Intrinsic value of Norfolk Southern Corp. common stock 68,624
 
Intrinsic value of Norfolk Southern Corp. common stock (per share) $287.93
Current share price $262.53

Based on: 10-K (reporting date: 2021-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.67%
Expected rate of return on market portfolio2 E(RM) 13.79%
Systematic risk of Norfolk Southern Corp. common stock βNSC 1.36
 
Required rate of return on Norfolk Southern Corp. common stock3 rNSC 17.05%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rNSC = RF + βNSC [E(RM) – RF]
= 4.67% + 1.36 [13.79%4.67%]
= 17.05%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Norfolk Southern Corp., PRAT model

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Average Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017
Selected Financial Data (US$ in millions)
Dividends on Common Stock 1,028 960 949 844 703
Net income 3,005 2,013 2,722 2,666 5,404
Railway operating revenues 11,142 9,789 11,296 11,458 10,551
Total assets 38,493 37,962 37,923 36,239 35,711
Stockholders’ equity 13,641 14,791 15,184 15,362 16,359
Financial Ratios
Retention rate1 0.66 0.52 0.65 0.68 0.87
Profit margin2 26.97% 20.56% 24.10% 23.27% 51.22%
Asset turnover3 0.29 0.26 0.30 0.32 0.30
Financial leverage4 2.82 2.57 2.50 2.36 2.18
Averages
Retention rate 0.68
Profit margin 29.22%
Asset turnover 0.29
Financial leverage 2.49
 
FCFE growth rate (g)5 14.33%

Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).

2021 Calculations

1 Retention rate = (Net income – Dividends on Common Stock) ÷ Net income
= (3,0051,028) ÷ 3,005
= 0.66

2 Profit margin = 100 × Net income ÷ Railway operating revenues
= 100 × 3,005 ÷ 11,142
= 26.97%

3 Asset turnover = Railway operating revenues ÷ Total assets
= 11,142 ÷ 38,493
= 0.29

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 38,493 ÷ 13,641
= 2.82

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.68 × 29.22% × 0.29 × 2.49
= 14.33%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (62,569 × 17.05%4,036) ÷ (62,569 + 4,036)
= 9.96%

where:
Equity market value0 = current market value of Norfolk Southern Corp. common stock (US$ in millions)
FCFE0 = the last year Norfolk Southern Corp. free cash flow to equity (US$ in millions)
r = required rate of return on Norfolk Southern Corp. common stock


FCFE growth rate (g) forecast

Norfolk Southern Corp., H-model

Microsoft Excel
Year Value gt
1 g1 14.33%
2 g2 13.24%
3 g3 12.14%
4 g4 11.05%
5 and thereafter g5 9.96%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 14.33% + (9.96%14.33%) × (2 – 1) ÷ (5 – 1)
= 13.24%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.33% + (9.96%14.33%) × (3 – 1) ÷ (5 – 1)
= 12.14%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.33% + (9.96%14.33%) × (4 – 1) ÷ (5 – 1)
= 11.05%