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Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Further, with economies opening up gradually and vaccines in place, industrial production and in-turn demand for railroad transportation will also increase, boding well for NSC stock.
Below are the key drivers of Norfolk Southern's value that present opportunities for upside or downside to the current Trefis price estimate:
For additional details, select a driver above or select a division from the interactive Trefis split for Norfolk Southern at the top of the page.
Norfolk Southern Corporation is one of the largest railroad companies in the Eastern United States, engaged primarily in the rail transportation of raw materials, intermediate products, and finished goods. Goods are primarily transported in the Southeast, East, and Midwest US, and via interchange services with rail carriers, to and from the rest of the United States. Norfolk Southern also transports overseas freight through several Atlantic and Gulf Coast ports.
Its principal subsidiary, Norfolk Southern Railway Company is wholly owned. NSC also has a joint ownership, along with CSX, of the Consolidated Rail Corporation. Norfolk Southern's route map covers most of the eastern United States, east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, covering nearly 22 states. Norfolk Southern's primary competitor is CSX Corporation which covers much of the same territory.
The company operates on 19,500 miles of track out of which 14,711 is owned outright and the remainder is pursuant to trackage rights or leases. Norfolk Southern offers the most extensive intermodal network in the eastern half of the United States.
Norfolk Southern’s business mix includes coal, intermodal, and general merchandise which is composed of six major commodity groupings: automotive; chemicals; metals and construction; agriculture; consumer products, and government; as well as paper, clay, and forest products. Although the company's primary role is transporting freight, its non-carrier subsidiaries engage principally in the acquisition, leasing, and management of coal, oil, gas, and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment.
Norfolk Southern's earnings depend upon the volume of freight contracts it sells, and the price of those contracts, while its expenses primarily consist of labor, fuel costs, utilities costs, and track maintenance. The largest of Norfolk Southern's customers include steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies, and chemical manufacturers.
We believe the Merchandise freight division is the most valuable division, and it accounts for roughly 60% of Norfolk Southern's total value. The key factors responsible for this are:
Declining fleet sizes and inadequate availability of truck drivers have significantly tempered the freight transport capacity of the trucking industry. The Hours-of-Service safety regulation for commercial vehicle drivers has put pressure on trucking capacity by limiting the number of working hours for truck drivers. The tight trucking capacity will lead to high volumes of freight shifting to railroads. As the demand for railroads’ services increase, so will their pricing power. This provides an opportunity for Norfolk Southern to corner a larger share of U.S. intermodal shipments.
Robust growth in U.S. oil and gas output as a result of the shale boom boosted the shipments of the Chemicals Freight division, which transports a range of petrochemicals and related products, over the past few years. Though Norfolk's Chemicals shipments didn't see any growth in 2017, shipments are expected to recover somewhat as a result of the recent increase in oil prices. Current shipment levels of Chemicals freight are enough to make this the company's third most valuable division, though the situation may change if the division's shipments fall sharply due to an extended downturn in oil prices.
Norfolk Southern's stock has seen sharp decline since early February, after the WHO declared a global health emergency relating to coronavirus. The current coronavirus crisis will likely have a significant impact on railroad companies, due to an overall decline in manufacturing, lower consumer demand amid lockdown, lower oil prices impacting production and transportation of oil and related products, as well as lower natural gas prices resulting in lower demand for coal. Given that several countries are on lockdown, the exports are also expected to take a hit.
Norfolk Southern's coal shipments have declined over the recent quarters. This can be attributed to trends in the natural gas prices, lower exports, amid trade tensions, and a decline in coal production. Any significant growth is unlikely in the near term, given the trends in coal market. With gas prices being more attractive, the dependency on coal as an energy source continues to come down. In fact, as per EIA estimates, coal consumption in 2019 marked as lowest coal consumption year over the last few decades.