Norfolk Southern Corp. (NSC) benefits from a secular shift toward using railroads instead of other transportation methods, with the overall cargo moving by rail expected to increase over time despite the cyclical changes in the amount of coal that is transported in North America, says Ronald L. Altman, SVP and Senior Portfolio Manager at Anchor Capital Advisors LLC.
“After some deep fundamental and industry research, and talking in detail with company management, I concluded that coal is basically in an inventory adjustment more than it is in a secular decline. Inventories are coming down, export coal is slowing, and China’s demand is slowing and what have you. So to me, coal volume is a cyclical thing, and it will continue to come and go. However, secularly, the railroads are taking market share from the trucks in terms of carrying ‘stuff,’ so there is a secular growth aspect to them,” Altman said.
Altman bought NSC when it was under $60, when many in the investor community were concerned about the future of coal. Altman says his “alpha engine” consists of companies that are historically cheap based on cash flow, based upon enterprise value to EBITDA and based on current yield.
“When I can buy a company like NSC at the bottom-end of its valuation band, and I think there is a compelling secular story, a cyclical concern and a 3%-plus yield at the time, I’m very happy to buy the stock and be paid to wait. That’s basically how I look at everything. There are five analysts here at Anchor Capital who I work with closely, and we run screens all the time looking for attractive companies, and then either the analyst or the analyst and I will go out and visit the companies,” Altman said.
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