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Friday, 09/03/2004

I Think I Can, I Think I Can!
By Nich Sheldon
NSC - Norfolk Southern Corp

Company Description

Norfolk Southern Corp. (NSC) through its NSR subsidiary operates 21,500 route miles in 22 states, the District of Columbia and Ontario, Canada, serving every major container port in the eastern United States and providing connections to western rail carriers. NSC operates an extensive intermodal network and is the nation's largest rail carrier of automotive parts and finished vehicles.

[Source: Company Press Release]

Reasons to Invest:

This week's Drip of the Week is Norfolk Southern Corp (NYSE:NSC). There are several reasons why this freight train company is worthy of the Drip Advisor limelight. First and foremost, from a technical standpoint, the stock rates an eleven on a scale of one to ten. Secondly, the company offers an enticing dividend. Finally, NSC continues to outperform its closest competitors, and nearly every article I find about the stock paints an upbeat picture of the company.

Let's start with the news! On August 18th, Reuters put out a report stating that U.S. railroads were bracing for the fall peak season. The article was citing that unprecedented volumes this year have strained resources for railroads. Also noteworthy is the fact that railroads ship both raw materials and finished goods, and any slow in the current season could lead to a downfall in the sector. Should there happen to be any problems freighting shipments from abroad over the holidays, it could lead to an additional "Soft Patch" in the already slumping recovery. For example, Arch Coal Inc (NYSE:ACI) and Peabody Energy Corp (NYSE:BTU) both fell victim to rail congestion in the past couple of months, which has hurt profits not only for themselves, but also for the companies that were depending upon getting their shipments on schedule. Analysts' expect to see many more railroad type companies fidgeting over railway congestion, and if anything goes wrong from here to the end of the year, we could see sector wide sell-offs.

So now I bet your asking, why in the world would I take a chance on a stock that could be in a failing sector? Or, that could fall victim to delayed shipments, which ultimately could cause the company to miss their earnings guidance? The answer my eager readers, is this, Norfolk Southern Corp invested in new tracks and stations a few years ago. Union Pacific Corp (NYSE:UNP) and CSX Corp (NYSE:CSX) hired more crew and bought more equipment to cover shortages and relieve bottlenecks, but poor returns on investments and slow revenue growth has kept some railroads from spending on infrastructure in the past, and this is hurting them now. If you think about the fact that NSC has already built new tracks and repaired the existing tracks it means that they will be better prepared for surprising shipments or stalled trains. It also means that they have a little extra room in their budget to hire on some part-time help if the need arises.

Peak season is said to be from Mid-September through November. In this period of time, retailers abroad vie for space on clogged train lines. Most retail stores stock up on everything from apparel to computers before the holidays, which means that NSC could be making a lot of its fiscal profits during this stretch of time. Tom White, a rail industry spokesman said, "We've already had the nine busiest weeks in history and we haven't hit the full peak yet." This statement bodes well for the freighting industry, so long as we don't see any major glitches in the scheduling.

Since NSC has built so many new tracks and serviced its products, more companies may want to use NSC for the simple fact that they seem to be the more reliable source of freighters. Moreover, in 2003, intermodal shipping overtook coal as the largest source of shipping revenue for the major railroads. This marked the first time since records have been kept, that coal was not the largest source of shipping.

Norfolk's net income for the last quarter more than doubled ($213 Million) from the same period a year ago. Shipments of coal, metals, chemicals and construction equipment all surged on higher demands, which helped to urge an increase in revenues by 11 percent ($1.81 Billion). It is apparent to me that the TRAN Dow Jones Transportation Index is on fire. While analysts' are worried about congested rails leading the index lower, I am more focused on the long-term picture. Just being involved in a strong sector, such as the TRAN, for a long period of time, will enhance your financial well being in this market of uncertainty. Of course it doesn't hurt to pick a winning stock within that strong sector!

Ready for some technical analysis? Since October of last year NSC has been gliding through a tight ranged regression channel with vigor. What's more interesting is the fact that the stock started an entirely new regression channel (in March) within its October 03 channel. This newer channel has a trading range of 2+ points and since the beginning of its formation this past March, the stock has only closed below this channel once - and that was in April. On Thursday, NSC broke through the top bar of the October 2003 channel as well as the March 2004 channel, and closed one penny shy of its session high (29.29). Does this mean that the stock is overextended? Does this mean that the stock is ready for some profit taking? I think the answer to both of these questions is yes. After all, seven of the past eight sessions closed in the green.

The real question should be: How far will the stock come down before continuing its trend higher? If you are concerned with how much money you have to invest, and you really want to buy as much ownership as you possibly can (just like me), I would suggest using the extended weekend to research your entries and draw a plan for the trade. I could see a pull back to the simple 10 DMA (28.03) or the 13 DMA (27.94) as a more aggressive entry on the stock. More conservative traders may want to wait to see the stock retest the bottom bar of its March 04 channel, which is near the 50 DMA (26.64). I believe that it could take quite some time to see the 50 DMA retested, but on the other hand it's all speculation when you try and pinpoint, or better yet, hypothesize when and where any given stock will be in the future.

Using Qcharts, I drew the Daily, Weekly, Monthly, Quarterly, and Yearly chart on NSC. What impresses me the most is that the MACD and Stochastics indicators both note NSC on "buy" signals on every single one of those charts. Furthermore, NSC has closed higher for ten out of the past twelve months. Are you starting to get a mental picture of the chart? The picture in your head should include several sets of higher highs and higher lows, as well as strong support from just about every underlying DMA.

Are you tired of hearing all of this positive data? Me either! How about a little more? NSC divvies out $0.10, per share owned, per quarter, which tabulates out to an annual dividend of $0.40 per share owned. Considering how cheap the stock is to own, I am more than happy to invest in a 1.41% dividend yield, year over year.

This ends another exciting episode of the Drip of the Week. Stay tuned next week, as we will spotlight another stock worthy of the limelight.

P.S. I hope that each of you enjoy the extended Labor Day weekend. My wife and I are heading to the mountains for a little R & R (not Reading Railroad… GRIN). Since we are leaving before market close Friday, the Weekly Drip Portfolio will not be updated until Tuesday. May your travels be eventful and safe.

Plan your trade, and trade your plan.

Until Next Week,
Nich Sheldon
Editor In Chief

Broker Recommendations

Strong Buy         6
Buy                5
Hold               4
Sell               0
Strong Sell        0

Brokers Covering  15

DRIP Information:
Shares to Qualify = 1
Auto-reinvestment = No
Accept Foreign Accounts: Yes
Temper Enrollment: Yes

Min/Max Investment = $10-$3,000/quarter

Reinvestment Fees - 
Dividend investment fees: 5% to $2.50
Cash investment fees: 5% to $2.50
Auto reinvestment fees: N/A

Transfer Agent:
Bank of New York

Corporate Headquarters:
Norfolk Southern Corp
Three Commercial Place, Box 227
Norfolk, VA 23510
Phone: (757) 629-2600
Fax: (757) 629-2361


Copyright 2003

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