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Investing.com - Benchmark downgraded Norfolk Southern (NYSE:NSC) stock rating from Buy to Hold following the company’s second-quarter earnings miss and Union Pacific ’s acquisition bid. The stock, currently trading near its 52-week high of $288.11, has shown impressive momentum with a 19.69% year-to-date return. According to InvestingPro data, 15 analysts have recently revised their earnings expectations upward for the upcoming period.
Norfolk Southern reported second-quarter adjusted earnings per share of $3.29, falling short of the $3.31 consensus and Benchmark’s $3.35 estimate. Despite the miss, the company maintains robust gross profit margins of 49.49% and an overall "GOOD" financial health rating from InvestingPro. The railroad operator lowered its full-year revenue growth target to 2%-3% year-over-year from its previous 3% forecast, while adjusted operating ratio improvement is now expected at 100-150 basis points versus 150 basis points previously.
Union Pacific (NYSE:UNP) has made a $320 per share bid for Norfolk Southern, representing a 25% premium to NSC’s 30-day volume weighted average price as of July 16 and valuing the company at an enterprise value of $85 billion. Norfolk Southern, currently commanding a market capitalization of $63.67 billion and trading at a P/E ratio of 19.06, has maintained dividend payments for 44 consecutive years. The companies believe they can achieve $2.75 billion in annualized synergies within three years, including $1.75 billion in revenue synergies and $1 billion in expense reductions.
The transaction timeline includes up to six months to file the Surface Transportation Board application followed by a 16-month review process, with the deal targeted to close by early 2027. The merger would be the first to test the STB’s more stringent 2001 merger rules, with potential regulatory concessions likely given some customer and network overlap.
Benchmark cited limited upside potential during the lengthy regulatory review as the primary reason for the downgrade, noting that the outlook could change if a competing bid emerges for Norfolk Southern.
In other recent news, Norfolk Southern’s proposed merger with Union Pacific has led to a series of significant developments. The merger, valued at $85 billion, has faced opposition from the largest rail union in the United States, which plans to contest the deal during the approval process. Fitch Ratings has placed Union Pacific on Rating Watch Positive, citing potential benefits from the merger, including enhanced business model resilience and network efficiencies. S&P Global Ratings has revised Norfolk Southern’s outlook to positive, highlighting the competitive advantage of an integrated transcontinental network.
Meanwhile, Norfolk Southern’s stock has been downgraded by both JPMorgan and Evercore ISI. JPMorgan moved its rating from Overweight to Neutral, raising its price target slightly to $288, while Evercore ISI downgraded the stock from Outperform to In Line, adjusting the price target to $289. Both firms noted the limited upside potential during the merger review process. These developments reflect the ongoing complexities and market reactions surrounding the merger proposal.
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