On Dec 27, 2013, we reaffirmed our Neutral recommendation on Norfolk Southern Corporation (NSC). The company’s top line and bottom line surpassed the respective Zacks Consensus Estimate and year-ago results. Currently, the Zacks Consensus Estimate for fourth quarter earnings is pegged at $1.49 per share.
Why Retained
We remain highly optimistic on the company’s growth across most segments. In the coming days, Norfolk Southern expects growth mainly on Intermodal and Merchandise shipments, which can largely offset the lackluster performance by the Coal segment.
Merchandize is expected to benefit from crude shipment, frac sand shipments, along with shipment of plastics and shale-related liquid petroleum gases. Further, Automotive shipments also remain on the growth trajectory with North American vehicle production projected to grow around 6% in the fourth quarter and 3% in 2014. Norfolk Southern is also likely to gain from the Metal market, with domestic steel production growth estimated at 4% in 2014.
Intermodal will continue to benefit from new business arising from truckload conversion to rail intermodal services. The company will also benefit from construction of new facilities and launch of new services like the South Carolina Inland Port project at Greer, South Carolina as well as likely conversion of highway shipments from the port of Charleston to Greer for automaker BMW and other customers.
With respect to agricultural shipments, Norfolk Southern expects more grain crop export going forward along with higher paper and lumber shipment backed by gradual recovery in the housing market.
However, the near-term growth of Norfolk Southern is expected to be tempered by weak coal volumes that continue to hurt revenues. Subdued coal demand in the south and high inventory levels built from 2012 remain the deterrent factors to growth in its coal business. Given declining demand for coal in power plants, utility coal revenues will continue to remain headwinds for the company in 2013. Softness in the domestic metallurgical market will also hamper volume growth.
Further, the export coal market is also expected to remain under pressure due to weaker demand in Europe and Asia. Weakening of Australian currency and lower benchmark met coal prices will affect pricing going forward. As a result, we have a cautious stance over the long-term prospects of the company.
Norfolk Southern, which operates with other railroad companies like currently retains a Zacks Rank #2 (Buy).
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