A Look At Norfolk Southern’s Automobile Segment
Norfolk Southern (NYSE:NSC), a leading railroad company operating in the eastern U.S., generated around 8% of its revenues in 2013 from its Automotive shipments. What makes the segment an important part of Norfolk Southern’s business is its strong growth over the past three years. Since 2010, automotive carloads have shown the highest increase compared to other segments – Coal, Agricultural, Chemicals, Metals & Construction, Forest Products and Intermodal. With its vast network in eastern U.S., Norfolk Southern may be able to capitalize on growth in the U.S. automobile industry and continue to see its automobile carloads increase. However, competition from other railroads operating in the same region may deter Norfolk Southern’s growth.
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A Comparison Across Segments
| Segment | Compounded Average Growth Rate from 2010 to 2013 | |
| Carloads | Revenue per Carload | |
| Coal Freight | (3.6)% | 2.0% |
| Intermodal Freight | 5.1% | 2.1% |
| Agriculture and Consumer Products Freight | (1.4)% | 4.0% |
| Chemicals Freight | 2.6% | 3.7% |
| Metals & Construction Commodities Freight | 1.5% | 6.9% |
| Paper, Clay and Forest Products Freight | (1.4)% | 4.3% |
| Automotive Freight | 8.5% | 2.3% |
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The above table presents the compounded average growth rate (average growth rate per year) from 2010 to 2013 for carloads and revenue per carload for each of Norfolk Southern’s segments. We can see that automotive carloads have shown the highest growth since 2010 with an average growth rate of 8.5% per year. The next best performance was by the Intermodal segment, whose growth rate was 3.4% less than that of the automotive segment.
Growth in revenue per carload for Norfolk Southern’s Automotive segment has not been high compared to other segments. Since 2010, revenue per carload for the Automotive segment has grown at an average rate of 2.3% per year, better than only two other segments – Coal and Intermodal.
Growth In Automotive Industry Drives Shipment Volumes
Growth in Norfolk Southern’s automotive shipments has been driven by the recovery in the U.S. automobile industry. After a severe dip in sales in 2009 due to the global financial crisis, light vehicle sales in the U.S. grew from 11.6 million units in 2010 to 15.5 million units in 2013, at an average growth rate of 7.5%. [1] [2] Declining automotive loan interest rates during that period also helped encourage buyers to purchase vehicles.
Light vehicle sales in the U.S. are expected to continue to grow in 2014 with a growth rate of around 3%. This will help boost Norfolk Southern’s automotive carloads in 2014.
Capitalizing On Growth In The U.S. Automotive Industry
In order to benefit from the growth trend in the U.S. automotive industry, any railroad needs to have access to vehicle assembly plants and various distribution centers. This is because automobile manufacturers would like to keep their logistics costs low, and will therefore contract with those railroads nearest to their assembly plants and distribution centers. The majority of the assembly plants are located in eastern U.S. and are highly concentrated in Michigan, Ohio, Indiana and Kentucky. [3] There are a few assembly plants in Illinois, Alabama and Tennessee as well.
Norfolk Southern has a vast network for hauling vehicles and spare parts in the eastern U.S. Its network has access to 27 assembly plants of manufacturers such as BMW, Chrysler, Ford, General Motors, Honda, Hyundai, Mercedes-Benz, Mitsubishi, Subaru, Toyota, and Volkswagen. [4] Given its vast coverage and access, Norfolk Southern is well positioned to benefit from further growth in the U.S. automotive industry.
Increasing vehicle sales and vast network coverage support growth in Norfolk Southern’s automotive carloads. However, competition from other railroads may prohibit its growth. Norfolk Southern has to focus on competition primarily from CSX, since they both operate in the same geographic region. Historically, CSX has handled higher automotive carloads than Norfolk Southern. [5] [6] Therefore, it is possible that Norfolk may not be able to grab a bigger chunk of the growth in automotive carloads in eastern U.S.
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Notes:- IHS Automotive US Light Vehicle Outlook, January 2012, www.chicagofed.org [↩]
- North America Production Summary, March 18 2014, www.wardsauto.com [↩]
- List of automotive assembly plants in the United States, www.wikipedia.org [↩]
- Norfolk Southern’s Presentation at BB&T Capital Markets Transportation Conference, February 12 2014, www.nscorp.com [↩]
- CSX’s Weekly Carloading Report, www.csx.com [↩]
- Norfolk Southern’s Weekly Carloading Report, www.nscorp.com [↩]