Coal Shipments To Weigh On Norfolk Southern’s Revenue Per Unit

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC), one of the leading railroad networks in eastern U.S., is scheduled to report its fourth quarter 2013 results on January 22. We expect the company to face challenges on the revenue per unit side as it continues to face headwinds in coal shipments which puts a downward pressure on revenues. However, Norfolk Southern has been trying to reduce its dependency on coal shipments by focusing on intermodal and general merchandise shipments in order to drive growth in volume and revenue.  We expect growth in chemicals, automotive, agricultural and intermodal shipments to drive overall volumes in the fourth quarter.

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Revisiting Q3 2013

In the third quarter, Norfolk Southern’s revenue grew 8% to $2.8 billion on the back of 4% growth in volumes and 1% growth in revenue per unit. [1] Its operating ratio, which is its operating expenses expressed as a percentage of revenues, improved by 3% compared to third quarter 2012 to reach 69.9% due to improvements in network velocity and technology, and better asset and resource utilization. Declines in coal shipment were offset by growth in intermodal and merchandise shipments.

Norfolk Southern Will Continue To Face Challenges In Coal Shipments

Revenue generated by coal shipments were down 9% in the third quarter 2013 due to declining coal volumes. [1] Coal shipments will continue to present headwinds for the company’s volumes and revenue per unit in the fourth quarter due to the shift to cheaper and cleaner natural gas and an inventory overhang in the Southern utilities. Though inventory levels at the Southern utilities have been declining, it will not have any positive impact on the fourth quarter’s coal volumes. Also, declining international demand for U.S. thermal and metallurgical coal will add to the burden. [2]

Intermodal Shipments Growth Will Have A Positive Impact On Revenues And Volumes

Norfolk Southern’s intermodal volumes increased 5% year-on-year in the third quarter 2013 and has seen solid growth throughout the year. [1] Volume of intermodal shipments has been increasing year-on-year and quarter-on-quarter since 2011. We expect the growth momentum to continue in the fourth quarter as well, complemented by Norfolk Southern’s intermodal capacity expansion through the Crescent Corridor and the new inland port in South Carolina to help boost Norfolk Southern’s overall volumes.

General Merchandise Shipments Could Help Bolster Growth In Revenue

Norfolk Southern’s general merchandise shipments comprise of commodities such as chemicals, petroleum products, finished vehicles and spare parts, consumer products and construction materials. In the third quarter 2013, revenue from merchandise shipments grew 11% due to increase in volumes. [1]

Increasing automobile sales and housing starts will help growth in Norfolk Southern’s automotive and housing construction related shipments in the fourth quarter 2013. Chemicals and petroleum products shipments will grow on the back of the growing U.S. oil and gas industry. Agricultural shipments declined in the previous quarter, but are expected to post growth in volumes due to strong harvest this season. We expect automotive, chemicals, grains and housing-related shipments to drive revenue for Norfolk Southern’s merchandise segment in the fourth quarter.

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  1. Norfolk Southern Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 23, 2013 [] [] [] []
  2. SHORT-TERM ENERGY OUTLOOK, December 10 2013, []
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