On Aug 22, 2014, we issued an updated research report on leading freight service provider Norfolk Southern Inc. (NSC).
The company reported an impressive second-quarter 2014 with both the top and the bottom line beating the respective Zacks Consensus Estimate. Significant growth across all commodity groups and a substantial improvement in operating ratio drove gains across the company, supporting strong earnings this season. The Norfolk, VA-based company currently carries a Zacks Rank #3 (Hold).
Norfolk Southern is likely to benefit from continuous investments in infrastructure, favorable pricing revisions and abundant opportunities within the transportation business sector. However, a weak performance at the export coal segment may hold back its momentum in the quarters ahead.
The company expects reasonable growth in the U.S. economy through the rest of the year, which should allow the company to maintain its solid momentum. Norfolk Southern’s focus on expense management is expected to boost its operating ratio, which stood at an all-time quarterly record of 66.5% in the second quarter.
We remain encouraged by Norfolk Southern’s growth across its Intermodal and Merchandise segments along with a better outlook for utility coal. The Merchandise segment is expected to benefit from crude, frac sand and grain shipment. Automotive shipments will also boost the segment owing to increased vehicle production in North America that is projected to grow over 4% in 2014. Meanwhile, housing starts, which are expected to grow by 15% in 2014, will boost shipments of lumber, glass, steel and wallboard.
On the other hand, domestic intermodal is set to leverage from volume growth and pricing opportunity, while the international intermodal division will likely expand at a slow pace for the rest of 2014. Norfolk Southern also remains committed to improve its service and efficiency and is adding various corridors to expand its network.
However, a weak coal business continues to hurt the company’s revenues. Management expects low export coal volumes on account of increased competition, particularly from Europe. Further, the domestic metallurgical coal market is also expected to remain under pressure due to plant closure, weak seaborne pricing and strong competition from Australia.
Though small, the expected increase in depreciation expense could affect the company’s bottom line in 2014. Use of older locomotives during the balance of the year is expected to increase repairs, which could increase its expense to some extent. Other potential risks faced by the company include regulatory issues, volatile fuel prices, labor problems and competitive pressure.
Key Picks from the Sector
Other stocks that warrant a look in this sector include Trinity Industries Inc. (TRN), GATX Corp. (GMT) and Canadian Pacific Railway Limited (CP). Trinity Industries sports a Zacks Rank #1 (Strong Buy), while GATX Corp. and Canadian Pacific Railway carry a Zacks Rank #2 (Buy).
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