Norfolk Southern To Ride Momentum to $85

Norfolk Southern Corporation’s (NYSE:NSC) first quarter earnings announcement last week followed the strong earnings trend set by competitors CSX Corporation (NYSE:CSX) and Union Pacific (NYSE:UNP). In line with our expectations, the company recorded a healthy 6% growth in the revenues, while income from railway operations rose by an impressive 24%. Growth in general merchandise and intermodal transport coupled with core price gains boosted the company’s top-line and bottom-line. A slump in domestic utility coal demand was the only negative in the quarter.

We have revised our price estimate for Norfolk Southern to $85, which is about 15% above the current market price. The new price estimate mainly reflects the dim outlook for domestic coal demand and high debt.

See our detailed analysis for Norfolk Southern here

Diverse Traffic Offsets Decline in Coal Volume

An improvement in the U.S. economy led railroads to higher traffic volumes in first quarter. General merchandise volume increased by 5% due to higher consumer spending activity. Being the largest carrier of autos and vehicle parts, Norfolk Southern benefited from the jump in automotive demand. Intermodal volumes also grew by 5% as the company continues to capture market share from trucks. Overall total volume growth was capped at 1% on a year-over-year basis as coal saw a 12% decline in shipments.

The company reported a 6% year-over-year increase in revenues, totaling $2.78 billion. Except for coal, all segments witnessed revenue growth driven by improved core prices and fuel surcharge recovery, which bolstered operating income by about 24% to $745 million. ^[1]

Positive Momentum on Improved Economic Conditions

We expect that the company will will fare well over the next few quarters on the back of higher consumer demand and industrial activity. An expected increase in agricultural produce and automotive demand coupled with moderate pricing gains should allow it to maintain its momentum, while greater highway truck conversions will keep driving intermodal growth . With its expansion and infrastructure development plans in place, we believe that the company remains poised to gain as the economy eventually recovers.  However, declining domestic utility coal demand should be a worrying factor as it contributes nearly 30% of our current price estimate.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Quarterly Financial Reviews, Norfolk Southern, April 24 2012 [↩]