Norfolk Southern (NYSE:NSC) is one of the leading railroads operating in eastern United States. After a dip in revenues in the first two quarters of 2013, Norfolk Southern’s revenues improved in the third quarter due to growth in housing materials, automotive and intermodal shipments. As we enter 2014, the company continues to face headwinds in its revenues from coal shipments but general merchandise and intermodal shipments look promising. In this article, we look at the key drivers impacting Norfolk Southern’s business in 2014.
Growth in housing starts will drive growth in revenue per unit for Norfolk Southern
Norfolk Southern’s construction shipments include housing sector material such as lumber, cement, bricks and aluminum products. In Q3 2013, the revenue per unit for construction shipments grew 8.6% year on year.  Housing starts are currently at its 5 year high and have increased by almost 30% year or year.  We expect the momentum to continue into 2014 and boost Norfolk’s construction shipments.
Recovery in automotive sales will help Norfolk Southern’s general merchandise volumes grow
Norfolk Southern’s automotive shipments, which include finished vehicles and spare parts, increased almost 9% in Q3 2013 driven by growth in sales of vehicles.  Sales in the US automotive sector have been growing for the past 3 years and is expected to continue to grow till 2018, but with a gradual decline in pace.  This offers good prospects for Norfolk Southern’s future automotive shipments.
Demand of spare parts is driven by wear and tear of vehicles. As vehicles age, they demand more repairs and servicing, which in turn increases demand for spare parts. The average age of a vehicle in US is at an all time high of 11.4 yrs and has been following an increasing trend.  Increasing average age of vehicles in US is another factor that positively impacts Norfolk Southern’s automotive shipments.
Increase in Crude Oil production will help Norfolk Southern’s revenue grow
In the eastern part of US, pipeline infrastructure is highly lacking and therefore crude oil has to be shipped by rail. Rail offers a greater geographic coverage compared to pipelines. Norfolk Southern is well positioned to utilize its extensive network in the east to ship crude oil coming in from Marcellus and Utica shale regions as well as western parts of the US. With crude oil production projected to grow to 8.5 million bbl/d in 2014,  revenues generated through crude oil freight is expected to rise.
Consistent growth in Intermodal Shipments and capacity expansion will drive highway to rail conversion
Intermodal shipments are goods containers shipped through two modes of transport such as rail to truck or rail to ship. Intermodal shipments accounted for 21% of Norfolk Southern’s overall revenues and 48% of overall volumes in the first three quarters of 2013.  Volume of intermodal shipments has been increasing year on year and quarter on quarter since 2011. We expect this trend to continue in the future complemented by Norfolk Southern’s highway to rail conversion capacity expansion through the Crescent Corridor and the new inland port in South Carolina.
- 2013 Third Quarter Financial Review, www.nscorp.com [↩]
- Housing starts data, www.mortgagenewsdaily.com [↩]
- 2013 Third Quarter Financial Review, www.nscorp.com [↩] [↩]
- Global auto sales head for 100 million by 2018, December 1 2013, www.usatoday.com [↩]
- Average U.S. car is 11.4 years old a record high, August 6 2103, money.cnn.com [↩]
- SHORT-TERM ENERGY OUTLOOK, November 13 2013, www.eia.gov [↩]