Norfolk Southern (NSC) Last Update 4/21/21
Related: LUV DAL UAL UNP
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
Norfolk Southern
STOCK PRICE
DIVISION
% of STOCK PRICE
Net Debt
10.5% $31
TOTAL
100%
$295
$264.13
Yours
Trefis Price
N/A
$288
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Norfolk Southern Company

VALUATION HIGHLIGHTS

  1. Merchandise Freight constitutes 60% of the Trefis price estimate for Norfolk Southern's stock.
  2. Intermodal Freight constitutes 30% of the Trefis price estimate for Norfolk Southern's stock.
  3. Coal Freight constitutes 10% of the Trefis price estimate for Norfolk Southern's stock.

WHAT HAS CHANGED?

  1. Impact of Coronavirus On Norfolk Southern's Stock

    • Norfolk Southern stock lost more than 40% – dropping from $195 at the beginning of 2020 to below $120 in late March 2020 – then spiked 2x to almost $240 now (through Feb 1, 2021). That means it has fully recovered, and well past the pre-pandemic levels.

      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.

  2. Q4 2020 Performance
    • Norfolk Southern reported a 4% decline in top line in Q4 2020. While the decline was seen in Merchandise and Coal segments, Coal revenue in particular plunged over 20%, due to continued weakness in coal demand, given the lower natural gas prices. The company's Intermodal revenues grew 5%, due to an increase in demand. The company has been focused on reducing its operating ratio, and it stood at 61.9% in Q4 2020, marking an all time low level. As such, EPS grew over 3% to $2.64 per share vs. $2.55 in the prior year quarter.
  3. 2.5x Growth In Norfolk Southern's Stock Over The Last 3 Years
    • Norfolk Southern’s stock price grew around 2.5x from around $80 by the end of Q2 2016 to around $200 by the end of 2019, led by growth in revenue, margins, and P/E multiple. Revenues grew from $9.9 billion in 2016 to $11.3 billion in 2019. The biggest change in revenue is the company’s intermodal segment, which grew 27% during the same period. Net income grew at 4.4x faster pace compared to Norfolk Southern’s revenues, led by margin expansion, and total costs as % of revenue has declined. EPS also saw strong growth, led by revenue and margin expansion, and a lower share count. The P/E multiple for Norfolk Southern grew a modest 4% from 17.9x in 2016 to 18.7x in 2019, based on trailing full year GAAP earnings. Accordingly, the stock price grew 2.5x.
  4. Coal Shipments Decline
    • With the increased use of cleaner sources of energy such as natural gas, the demand for coal has dropped significantly over the last few years. Consequently, the coal shipments have witnessed a sharp decline over the last five years. While the exports aided the overall coal shipments for railroad companies in 2018, the trend reversed in 2019, with the trade tensions. With oil prices and natural gas prices plummeting in 2020, coal demand is expected to remain weak in the near term.
  5. Decline In Light Vehicle Sales To Hamper Top Line
    • Since the beginning of 2017, the demand for light vehicles has slowed down, despite large discounts being offered by manufacturers to clear their previous inventories. This is largely because the pace at which cars or trucks are being purchased is not the same as the pace at which they are being replaced. Consequently, there is a void in the demand for these vehicles, which is visible from the decline in their sales. Now with the coronavirus pandemic, several automobile plants are shut, and this will further impact the sales in the near term. Since the railroad sector is closely correlated to the automobile industry, companies such as NSC have witnessed a decline in the auto shipments in the recent past.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers of Norfolk Southern's value that present opportunities for upside or downside to the current Trefis price estimate:

  • Norfolk Southern's EBITDA margin: We currently forecast Norfolk Southern's EBITDA margin to hover around the 49% mark throughout the Trefis forecast period. The company should be able to maintain high margins, driven by the company's productivity improvement initiatives.
    There could be an downside of over 10% to the Trefis price estimate if margin declines from 49% in 2019 to under 45% by the end of our forecast period.

Coal Freight

  • U.S. Rail Carloads of Coal: We currently forecast U.S. Rail Carloads of Coal to increase only marginally from 0.9 million in 2019 to 1.0 million by the end of the Trefis forecast period, as natural gas prices are expected to be lower. However, potential steps pertaining to loosening environmental regulation on coal production by the U.S. government could significantly boost coal production in the country. If the company is able see mid-single-digit growth in coal shipments, and reach total volume of over 1.4 million carloads by the end of our forecast period, it will result in a 5% upside to our 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.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

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:

Tightening trucking capacity

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.

Elevated levels of U.S. oil and gas output

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.

KEY TRENDS

Coronavirus Impact

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.

Volatile coal market

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.