On Oct 3, we maintained our Neutral recommendation on Norfolk Southern Corp. (NSC) owing to driving factors such as superior service and network capabilities, infrastructural investments, and accelerated growth in the Intermodal and Merchandize segments on the back of strong freight pricing.
However, several headwinds such as regulatory issues and competitive pressures along with the downturn in coal markets will likely limit the near-term upside potential. The transportation company holds a Zacks Rank #3 (Hold).
Why Maintained?
We believe that Norfolk Southern is well poised to benefit from strong pricing momentum owing to growing market demand and shortage in truckload transportation. We remain highly optimistic on the company’s growth across Merchandize and Intermodal.
In the coming months, higher shipments of crude oil and better conditions in the housing and construction markets will continue to be the prime growth drivers for the Merchandize segment. Additionally, increased volume of soybean and corn in Agriculture along with frac sand in the Metals and Construction sector will provide modest revenue opportunities for Norfolk Southern during the second half of 2013.
Going forward, consistent expansion prospects for highway conversion, new Intermodal service lanes, and business opportunities with shipping partners across the globe are expected to support Intermodal’s performance level. With a number of intermodal terminals under construction, the business prospects of the company look bright once these open.
However, soft coal demand in the south and high inventory levels built from 2012 remain the deterrent to growth in its coal business. Weakening of Australian currency and lower benchmark met coal prices remain other near-term concerns.
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 Corp. (CSX), which operates within the same territory as Norfolk Southern.
Other Stocks to Consider
Other stocks worth considering within the sector are American Railcar Industries Inc. (ARII) and Amerco Inc. (UHAL) with a Zacks Rank #1 (Strong Buy).
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