Intermodal Growth Will Likely Drive Norfolk Southern’s Earnings

Norfolk Southern (NYSE:NSC), one of the leading railroads in the eastern U.S., is scheduled to report its second quarter 2014 results on July 23. After a poor performance in the first quarter due to the severe winter weather, Norfolk Southern is on track to post strong growth in the second quarter driven by its Intermodal segment. General Merchandise shipments will also contribute to the growth. However, coal shipments may present headwinds due to declining export coal volume.

Revisiting First Quarter 2014

In the first quarter 2014, Norfolk Southern’s revenue declined 2% to reach $2.69 billion due to a decline in coal and merchandise volumes, which more than offset gains in the intermodal segment. ^[1] Its operating ratio (operating expense expressed as a percentage of revenues) increased 40 basis points to reach 75.2% due to the decline in revenues. The company’s earnings per share declined 17% compared to the previous year’s first quarter, primarily due to the favorable impact of gains from sale of land in the previous year.

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High Intermodal Volume and Revenue Per Unit May Boost Earnings

Monthly container volumes at U.S. ports have been at their five-year highs, in anticipation of the impact of contract negotiations between the West Coast longshore labor and marine terminal operators. ^[2] This has significantly impacted Norfolk Southern’s intermodal volume, driving it up 10.9% in the second quarter. ^[3] Growth at existing customers and carryover of first quarter’s shipments that were deferred due to bad weather, have also had a positive impact on intermodal volumes. Norfolk Southern’s second quarter earnings should see a favorable impact due to the strong growth in its intermodal segment.

Complementing intermodal volume growth, intermodal revenue per unit is also expected to be higher due to the positive impact of higher fuel surcharges. Norfolk Southern’s intermodal fuel surcharge is based on the price of East Coast highway diesel. Its average price during the second quarter of 2014 was $0.10 higher than it was in the previous year’s second quarter. ^[4]

General Merchandise Shipments Will Help Bolster Revenue

After a poor performance in the first quarter due to the severe winter weather, Norfolk Southern’s General Merchandise volume has shown significant growth in the second quarter. General Merchandise shipments include chemicals, petroleum products, agricultural products, metals and construction material, forest products and automotives. According to the second quarter carloading report, Norfolk Southern’s General Merchandise volume is up 6.7%. ^[3] Growth in end markets, favorable weather conditions and carryover from the first quarter have contributed to the increase in volume. If accompanied with an increase in revenue per unit, the segment could post high-single-digit growth in the second quarter and help boost Norfolk Southern’s revenue.

Coal Volume is Up but Revenue Per Unit Remains a Concern

In the first quarter 2014, Norfolk Southern’s coal volume declined 12.7% due to a loss of contract leading to a 15% decline in coal revenue. ^[1] However, it seems the company’s coal woes may have turned around. As per the carloading report for the second quarter, Norfolk Southern’s coal volume is up 2.2%. ^[3] The increase in volume may be attributable to the demand at utilities driven by the need to replenish inventory.

Despite growth in volume, Norfolk Southern’s coal revenue may decline due to the impact of diminishing shipments of export coal. U.S. export coal is suffering due to depressed global prices due to a lack of demand and an oversupply in global markets. Because of the low global price, exporting coal becomes unprofitable for U.S. coal miners, leading to fewer export coal shipments for Norfolk Southern. The decline in export coal shipments may have an adverse impact on coal revenue per unit in the second quarter. In the first quarter 2014, coal revenue per unit declined 2.4% due to an unfavorable product mix as a result of decline in export coal volume.

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1. Norfolk Southern First Quarter Financial Review, April 23 2014, www.nscorp.com [↩] [↩]
2. Retailers Step Up Holiday Imports In Case Of A West Coast Port Strike, June 9 2014, www.forbes.com [↩]
3. Norfolk Southern Carloadings Report, www.nscorp.com [↩] [↩] [↩]
4. Gasoline and Diesel Fuel Update, www.eia.gov [↩]