CONSERVATIVE GROWTH.
Norfolk Southern
Ticker symbol: NSC (NYSE) S&P Rating: BBB+ Value Line financial strength rating: B+ Current yield: 2.6%
Company Profile
Norfolk Southern Corp. was formed in 1982 as a holding company when the Norfolk & Western Railway merged with the Southern Railway. Including lines received in the split takeover (with CSX) of Conrail, the current railroad operates 21,000 route-miles of track in twenty-two eastern and southern states. They serve every major port on the east coast of the United States and have the most extensive intermodal network in the east.
Company business is about 29 percent coal, 19 percent intermodal, 14 percent agricultural and consumer products, 11 percent metals and construction, and 29 percent other. Within those categories, the railroad transports the usual mix of raw materials, intermediate products like parts, and manufactured goods. The company has been an innovator in the intermodal business, that is, combining trucking and rail servicesthe "Roadrailer," a train of coupled-together highway vans on special wheelsets is an example; at the terminal, a cab simply backs up to the van and drives it off.
The company provides a number of logistics services and has substantial traffic to and from ports and overseas destinations.
Financial Highlights, Fiscal Year 2010
Not too surprisingly, given a railroad"s ties to the economy in general and industrial production and import/export activity in particular, Norfolk Southern had a substantially "off" year in 2009, with revenues off almost 25 percent and per share earnings off almost half from the year before. The recovery, and a greater cost consciousness on the part of current and prospective customers, have returned NSC"s volumes to a "near normal" level, with freight volumes up 15 percent and quarterly earnings up as much as 50 percent from the prior year. With high fixed costs inherent in the rail business, volumes are exceptionally important to profitability. The company continues to be highly efficient, with an industry-leading operating ratio (variable costs to revenue) of 71.9 percent; maintaining volumes and this level of operating efficiency are key to the company"s future. Indeed, FY2011 revenues are expected to grow back toward FY2008 highs, and the effects on profits will be noticeable, as the company is expected to earn $4.75 per share in FY2011. NSC raised the dividend twice in FY2010, a strong sign of management"s confidence in the business and in the recovery.
Reasons to Buy
NSC"s results for FY2011 should continue the momentum established in FY2011. Volumes are strong, and while cyclical, we think the recession may have led many customers to use more cost-effective transportation methods, particularly intermodal, for the future. NSC"s 2009 operating ratio of 71.9 percent (the ratio of variable or operating costs to revenue, down some 3.5 percent from 2009 reflecting volume scale and efficiency, is one still one of the best in the industry and better than the best-ever 76 percent posted by our second favorite rival Union Pacific). This railroad has done an excellent job containing costs and sizing its physical plant for its demand.
NSC has proven over the past thirty years that it can compete effectively for long-haul truck business with its intermodal offerings, and has some of the most compet.i.tive service and terminal structures in the business. It has gained market share from trucks. Additionally, NSC serves some of the more dynamic and up-and-coming manufacturing markets in the United States, namely, Asian and other foreign-owned manufacturing facilities found particularly in the Southeast. The company has created a "Heartland Corridor" time freight and double-stack container routing between Chicago and the East Coast, reducing distance by 250 miles and more importantly, transit times from four to three days. Such innovations will further a.s.sert the company"s leadership. Additionally, we like the strength and diversity coming from serving the domestic and especially the foreign-owned auto industrythe company serves plants for (in alphabetical order) BMW, Chrysler, Ford, General Motors, Honda, Isuzu, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Subaru, Suzuki, and Toyota. Toyota recently gave NSC its highest award for overall logistics excellence, its seventh such award since 1996.
Reasons for Caution
There are two concerns: first, the strength of the recovery and the overall economy. Recessions hurt this company. Second, much of the growth potential is in the intermodal business (trailers, containers on specialized flat cars); this business tends to be highly compet.i.tive and relatively low in margin. Additionally, higher fuel prices can hurt, but this is usually offset somewhat by increased use of rail transport as customers are looking to save on fuel costs, and also on fuel surcharges the company levies on shipments from time to time.
CONSERVATIVE GROWTH.
Northern Trust Corporation
Ticker symbol: NTRS (NASDAQ) S&P rating: AA Value Line financial strength rating: B++ Current yield: 2.1%
Company Profile
Northern Trust Corporation, founded in 1889, is a multibank holding company headquartered in Chicago that provides personal wealth management and financial services, and corporate and inst.i.tutional services through the corporation"s princ.i.p.al subsidiary, the Northern Trust Company, and other bank subsidiaries. The corporation has seventy-nine offices located in eighteen of the more populous states. As of June 30, 2010, Northern Trust had approximately $50 billion in banking a.s.sets, more than $603 billion in a.s.sets under management and $3.6 trillion in a.s.sets under custody.
Global offices are situated in Amsterdam, Bangalore, Beijing, Dublin, Hong Kong, Limerick, London, Singapore, Tokyo, and Toronto. The corporation also owns two investment management subsidiaries: Northern Trust Investments, N.A.; and Northern Trust Global Advisors, Inc.
Northern Trust Corporation organizes client services around two princ.i.p.al business units: Personal Financial Services (PFS) and Corporate and Inst.i.tutional Services (C&IS). Northern Trust Global Investments (NTGI) provides investment products and services to clients of both PFS and C&IS.
Personal Financial Services offers personal trust, estate administration, private banking, residential real estate mortgage lending, a securities brokerage, and investment management services to individuals, families, and small businesses. PFS operates through a network of eighty-four offices in the eighteen states where Northern Trust operates. Approximately 25 percent of the wealthiest American families employ NTRS for a.s.set management or administration.
Corporate and Inst.i.tutional Services is a leading provider of trust, global custody, investment, retirement, commercial banking, and treasury management services worldwide. It provides a.s.set management services to large corporations and inst.i.tutions such as foundations, public retirement funds, insurance companies, and endowments. Other services include benefit payments, portfolio a.n.a.lysis, and electronic funds transfer.
Northern Trust"s inst.i.tutional clients reside in over forty countries and include corporations, public retirement funds, foundations, endowments, governmental ent.i.ties, and financial inst.i.tutions.
Financial Highlights, Fiscal Year 2010
Northern Trust earns about three-quarters of its net income from fees and services, and the other quarter from interest income; that is, net interest income on loans outstanding. Both figures peaked in 2008 and softened with the economic slowdown that followed. Noninterest income, which also includes gains from trading and currency exchange, continues to be somewhat soft as investment management fees and foreign exchange gains have declined slightly. The low interest rate climate has also softened interest income. The company is expected to earn $3.20 per share in 2011 after $2.80 in FY2010 and $3.16 in FY2009.
Reasons to Buy
Due to poor performance, damaged reputations, and ongoing uncertainties, we continue to avoid most financial services companies on our 100 Best list. But Northern Trust is an exception, based on its solid reputation and relatively strong performance during the downturn. Northern Trust did take $1.6 billion in TARP funds in November 2008 during the financial crisis but was the first inst.i.tution to repay those funds in February of the following year. The company was also one of very few that did not alter nor suspend its dividend during the crisis.
NTRS"s clients concerns, and thus NTRS a.s.set management strategy, is focused on capital preservation. NTRS"s investment strategy is very conservative and its leverage is the lowest among all their compet.i.tors. The company maintains capital ratios in the mid-13 percent range. These ratios essentially reflect equity capital as a percentage of risk-weighted a.s.set, which in this business, are primarily loans. NTRS"s ratios are twice the industry norm, suggesting that the company is well capitalized and on safer footing going forward.
In summary, we like this company"s reputation and conservative approach, both of which make it a favorable selection in this industry and a good long-term choice.
Reasons for Caution
It appears that interest rates will remain at historically low levels for the foreseeable future, which will continue to act as a drag on NTRS"s treasury-heavy portfolios. We are also concerned about the slight dip in investment fee income; there is a lot of compet.i.tion chasing a relatively fixed base of trust and investment management accounts; at 58 percent, this is the largest component of the company"s revenue and profit. A lot depends on the continued favor of the Northern Trust brand.
AGGRESSIVE GROWTH.
Nucor Corporation
Ticker symbol: NUE (NYSE) S&P rating: A Value Line financial strength rating: A Current yield: 3.1%
Company Profile
Nucor is the fourth-largest global steel producer (by market cap) and the largest U.S.based producer. It is also the largest recycler in North America, recycling some 13.4 million tons of sc.r.a.p steel in 2009. Their production model is unique, based on numerous mini-mills and the exclusive use of sc.r.a.p material as production input. Nucor operates sc.r.a.p-based steel mills in twenty-two facilities, producing bar, sheet, structural, and plate steel product. Production in 2009 totaled 14 million tons, after a far more robust 20.4 million tons in 2008.
Nucor"s steel mills are considered to be among the most modern and efficient in the United States. Recycled sc.r.a.p steel and other metals are melted in electric arc furnaces and poured into continuous casting systems. Sophisticated rolling mills convert the various types of raw cast material into rebar and basic shapes such as angles, rounds, channels, flats, sheet, beams, plate, and other products.
The company operates in three primary businesses: Steel Mills, Steel Products, and Raw Materials.
1. The Steel Mills segment produce hot-rolled steel, including angles, rounds, flats, channels, sheet, wide-f.l.a.n.g.e beams, pilings, billets, beam blanks, and plate and cold-rolled products. These products are sold to a variety of heavy manufacturing businesses and some construction.
2. The Steel Products segment produces materials primarily for the commercial construction industry, including steel joists and joist girders, steel deck, fabricated concrete reinforcements, fasteners, metal building systems, and wire and wire mesh.
3. The Raw Materials segment gathers and sells ferrous and non-ferrous metals and provides brokerage, transportation, and other handling services.
Financial Highlights, Fiscal Year 2010
A sharp decline in construction and manufacturing created a deep revenue and profit trough in 2009. During that period, sales fell some 53 percent from 2008, and earnings fell from a record $6.01 per share to a dismal $.94 loss. Not only was there a deep drop in demand, but it came off a couple of years of very tight supply and strong pricing in 200708. In FY2010, business recovered to a level respectfully close to FY2007 performance at $15.8 billion (compared to $11.2 billion in 2009 and $23.7 billion in 2009) with earnings still attenuated at $.42 per share; FY2011 looks a little stronger with revenues at about $17.8 billion and earnings in the $2.30 range. Going forward, it appears that the sort of tight markets experienced in 2008 are unlikely to return, and that revenues and earnings in this range are likely to continue. As markets have balanced and pricing has weakened, operating margins have weakened as well into the 7 percent range from a previous high of 22 percent. The numbers show the influence of volume on this high fixed cost business, but pricing is also a key factor. Importantly, cash flows run well ahead of the actual earnings numbers, and the company has been generous with its dividends, albeit with a cut during the downturn.
Reasons to Buy