Norfolk Southern Has Upside on Natural Gas, Housing Recovery

With improvements in petroleum and petroleum product shipping offsetting coal volume losses over the last two quarters, it’s apparent that the railroad industry is capitalizing on the current natural gas boom. Now, as the housing industry has begun to show signs of improvement, Norfolk Southern (NYSE:NSC) looks to benefit as it is a major bulk shipper for construction materials. According to Trefis estimates, Norfolk stock derives nearly 19% of its value from its construction freight and forest products divisions. Below we take a look at how significant an impact a housing recovery would have on Norfolk’s value.

We have a $78 price estimate for the stock, which is around 5% above the current market price.

See our complete analysis for Norfolk Southern here

Increase In Housing Construction

Housing starts increased to 760,000, growing 23.6% in June 2012 as compared to June 2011. ^[1] Simultaneously, housing prices have also been rising month over month, which points to a recovery in the housing industry. Construction materials for housing typically include lumber, wood, gravel, metal, iron, and steel. Should the market continue to recover, demand for these products will likely increase going forward. Rail shipments for lumber and wood products picked up in July 2012, growing by 9% over 2011.

Norfolk reflects freight for construction materials in two separate divisions – metal & construction commodities freight and paper, clay and forest products freight. We estimate a near flat market share for Norfolk in both divisions going forward because of the presence of strong competitor CSX Corp., which operates in the same region as Norfolk. However, overall U.S. carloads in both categories are likely to rise in the next few years, which will drive revenues for both companies.

Increased Advertising

Norfolk Southern has recently ramped up its advertising spending. It launched a new television commercial that highlights railroads’ contribution to the growth of the U.S. economy. ^[2] The ad campaign appears to be coinciding with the U.S. economy showing some signs of recovery. Industrial output has picked up of late on improving utilization levels in the sector. While the ad campaign is unlikely to directly result in significant new revenues, it could help Norfolk in finding locations and partners for the construction of new rail routes in the future.

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1. July Railtime Indicators, Association of American Railroads, August 3, 2012 [↩]
2. Norfolk Southern Corp. : Norfolk Southern highlights economic development in new television ad, 4-traders.com, August 13, 2012 [↩]