The stock has had a pretty incredible run of over 40% since September. But this does not mean that it is overvalued yet! How about the technical situation?
I give the stock a 9.71 grade as of today. Anything over 5 is bullish and over 8 very bullish!
Let's see if the fundamentals can support the current valuation:
P/E - The current P/E is 18.94 which is right around the 10 year average. That average is somewhat skewed by bad results in 2003, so the stock is a bit expensive by historical standard and has probably run a bit ahead this year. But the forward P/E is a very reasonable 12.87 which is below average historically.
Price-to-sales - Stand currently at 2.38. This is below industry average which is good, but it is also very high historically which is bad! I like the Price-to-Sales ratio because it is the hardest one to manipulate. It is tough to compare between industries, but a historical comparison is a good reference. P/E ratios are good, but a good accountant can adjust earnings up and down as needed!
Price-to-Book - Stands at 2.91. Historically speaking, this is also high. It is also higher than the industry average.
Debt/Equity - Is a moderate 0.92. It has been going down over the last 10 years, but railroad is a capital intensive industry!
Net margins are around 12% which is in line with the last 4 years, but much better than earlier this decade.
Earnings - Estimates for earnings over the next couple of quarters and FY12 have gone up over the last 90 days. This is positive. In addition, in its earnings release, the company management was very optimistic for the next fiscal year. They see the economy recovering and also export of grain and coals having a positive on future earnings. The next quarter's earnings could be skewed because of the situation in Australia which is driving for more coal exports from the US. The company plans to hire or rehire 2900 employees which is a positive sign that it sees improving conditions overall. Earnings are projected to grow around 15% for the next 5 years - lower than the industry average, but supportive of a 15 P/E! And the company pays a 1.54% dividend. Not great, but a positive nonetheless. The company surprised to the upside the last 4 quarters so they have tendency to be conservative in their estimates.
Overall, mostly positive indications.
Average recommendation is a Moderate Buy with still 18 analysts rating it a Strong Buy!
MSN Stock Scouter gives it a 9 (Strong Buy) and Zack ranks it a 3 (Hold).
Looking at the charts, we can see area of support around Fibonacci retracements - the closest ones is between $64 and $65. The next one is around $60 and $61 and the last one at around $56. These look like pretty strong consolidation area. Going back to 2008, there is strong resistance around $70 and the stock was unable to break through then! We would need to have the technical indicators take a dip below 8 (like in early October and mid-November), indicating a consolidation period before taking a position!
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