Norfolk Southern Corporation (NSC) reported weaker-than-expected third-quarter 2014 numbers. Nevertheless, we believe an improving U.S. economy, substantial surge in manufactured and retail goods, and a sharp rebound in several end markets should benefit this key player in the railroad services industry over the coming quarters.
Norfolk Southern’s long-term fundamentals and growth prospects remain appealing owing to its continued investments in key projects and new businesses. Management expects 2014 capital expenditure of approximately $2.2 billion, of which over $910 million will be dedicated to roadway spending. The company expects to invest approximately $550 million in upgrading locomotive and freight cars and spend $220 million on PTC (positive train control). Investments in facilities and terminals will involve $210 million. The rest of the spending will be aimed at technological upgrades, infrastructural development and other projects.
The company’s focus on expense management is also encouraging. We believe the company will gain from its superior service and network capabilities, infrastructural investments and increased efficiency in the intermodal network.
On the flip side, we are concerned about the weak performance of the company’s coal business in the third quarter of 2014. Segmental revenues in the quarter declined 2% year over year to $626 million. Revenues were hurt by a weak global export market and mild weather, and lower natural gas prices in the utility market. Continued below par performance of the segment has the potential to impact the stock adversely.
Norfolk Southern faces intense competition from motor carriers and railroads, and substantial competition from ships, barges and pipelines. The company’s primary competitor is CSX Corporation (CSX), which operates in the same territory. The company utilized internal resources to build and maintain its rail system.
Norfolk Southern currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked stocks worth considering in this sector are American Airlines Group Inc. (AAL), Kansas City Southern (KSU) and CSX Corp. (CSX) American Airlines has a Zacks Rank #1 (Strong Buy), whereas CSX and Kansas City Southern hold a Zacks Rank #2 (Buy).
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