Norfolk Southern Corporation (NYSE:NSC) will report its first quarter earnings on Tuesday. We believe that the company will follow the record earnings posted by CSX Corporation (NYSE:CSX) and Union Pacific (NYSE:UNP) in a sign that the U.S. economy is showing some growth. We expect that higher traffic volumes, mainly from the automotive segment, coupled with core price gains will likely translate into higher earnings for the company. Intermodal transport will also support the company’s earnings as railroads continue to grab market share from trucks. The company’s dependence on coal, however, will hurt it as domestic coal demand slumps.
Our price estimate for Norfolk Southern is $91, which is around 30% above the current market price.
Economy to boom traffic volumes, coal seen declining
- Norfolk Southern’s Q2 2016 Earnings Preview: Lower Shipments And Fuel Surcharge Revenue To Weigh On Results
- How Do Union Pacific, Norfolk Southern, And CSX Compare In Terms Of Efficiency Of Their Rail Networks?
- Which Are The Prominent Growth Areas For Rail Companies This Year?
- Automotive Shipments: The Most Prominent Growth Area For Norfolk Southern This Year
- Why We’re Revising Our Price Estimate For Norfolk Southern To $86
- What Was The Extent Of The Impact Of The Decline In Oil Prices On Norfolk Southern’s Q1 Revenue?
For the transportation industry, volume growth is largely dependent on economic activity. Some recent encouraging economic reports should help the company maintain positive momentum, as evidenced by CSX and Alcoa’s earnings announced earlier. Norfolk Southern, the biggest carrier of autos and vehicle parts, stands to gain the most from pent-up automotive demand. An increase in Marcellus Shale gas exploration projects will also benefit the company due to its proximity to the gas fields.
What could worry the company is declining domestic coal demand, which has been battered by recent EPA regulations. Coal contributes nearly 30% of our current price estimate and any prolonged weakness could adversely impact the valuation.
At witnessed by its competitors, the company could see an improvement in operational performance due to the relatively mild weather conditions in the first quarter. Overall, we expect Norfolk Southern to post solid results as stronger volumes and pricing should drive revenue growth. Rising fuel costs will also lead to higher fuel surcharges, bolstering the earnings.