Is the Norfolk Southern Corporation (NYSE: NSC) expensive for a reason? A look at its intrinsic value
Today we’re going to review one way to estimate the intrinsic value of Norfolk Southern Corporation (NYSE: NSC) by projecting its future cash flows, then discounting them to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
See our latest review for Norfolk Southern
Is Norfolk Southern valued enough?
We use the 2step growth model, which simply means that we take into account two stages of business growth. In the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10year Free Cash Flow (FCF) estimate
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 

Leverage FCF ($, Millions) 
US $ 2.77 billion 
US $ 2.97 billion 
US $ 3.23 billion 
3.02 billion US dollars 
US $ 2.90 billion 
2.84 billion US dollars 
2.82 billion US dollars 
2.82 billion US dollars 
2.84 billion US dollars 
2.87 billion US dollars 
Source of estimated growth rate 
Analyst x9 
Analyst x4 
Analyst x3 
Analyst x2 
Is @ 3.79% 
East @ 2.05% 
East @ 0.84% 
Is 0.01% 
East @ 0.6% 
Is 1.02% 
Present value (in millions of dollars) discounted at 7.3% 
US $ 2.6k 
US $ 2.6k 
US $ 2.6k 
US $ 2.3,000 
US $ 2.0k 
US $ 1.9k 
US $ 1.7k 
US $ 1.6k 
US $ 1.5k 
US $ 1.4k 
(“East” = FCF growth rate estimated by Simply Wall St)
10year present value of cash flows (PVCF) = US $ 20 billion
It is now a matter of calculating the Terminal Value, which takes into account all future cash flows after this tenyear period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5year average of the 10year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.3%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 2.9B × (1 + 2.0%) ÷ (7.3% – 2.0%) = US $ 56B
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 56 billion ÷ (1 + 7.3%)^{ten}= US $ 28 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 48 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US $ 247, the company appears to be slightly overvalued at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Norfolk Southern to be potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account debt. In this calculation, we used 7.3%, which is based on a leveraged beta of 1.116. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
While valuing a business is important, it’s just one of the many factors you need to assess for a business. It is not possible to achieve a rocksolid valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or riskfree rate changes sharply, output can be very different. Can we understand why the company is trading at a premium over intrinsic value? For Norfolk Southern, we’ve compiled three important things you need to assess:

Risks: Concrete example, we have spotted 1 warning sign for Norfolk Southern you must be aware.

Future benefits: How does NSC’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.

Other high quality alternatives: Do you like a good allrounder? Explore our interactive list of highquality stocks to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you longterm, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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