Norfolk Southern may see material upside with activists - analysts

Norfolk Southern (NYSE:NSC) may see "material upside" after a report that an activist investor group has built a $1 billion stake in the railroad operator and is pushing for the ouster of CEO Alan Shaw. Norfolk Southern rose 5.6%.

"Activism at Norfolk Southern could yield considerable earnings upside with a revamped, operations-focused culture; but finding the right leadership will be critical to unlocking long-term value for shareholders," Barclays analyst Brandon Oglenski, who has an equal weight rating on NSC, wrote in a note on Thursday.

An activist group led by Ancora has taken a stake and nominated a majority slate of directors to the company's board, the WSJ reported late Wednesday. Hedge funds Sachem Head Capital Management and D.E. Shaw also recently began building their own stakes in Norfolk Southern (NSC).

"Past activist-led culture changes have delivered meaningful upside for carriers such as Canadian Pacific and CSX; more recently, Union Pacific is showing considerable promise under new CEO Jim Vena," Oglenski wrote.

Barclay's Oglenski raised his price target on Norfolk Southern (NSC) to $255 from $235.

Bank of America analyst Ken Hoexter agreed that management change at railroad companies' can lead to upside for the operators.

"In our 22+ years of rail coverage, we have seen that management talent can lead to actualization of a rail’s potential," Hoexter, who has a buy rating and $255 price target on NSC, wrote in a note on Monday. "This is supported by multiple examples over the past decade+."

BofA's Hoexter sees potential upside for Norfolk Southern (NSC) by improving its margins.

"Given NSC’s current industry-lowest margins, we think it has upside potential if it can match industry average, or in-region peer’s level by increasing efficiencies," Hoexter added.

The WSJ report comes after TheDeal.com earlier this month highlighted that Norfolk Southern (NSC) could become an activist target given the railroad operator's recent issues, including the toxic chemicals derailment last February in Ohio.