Norfolk Southern’s Merchandise And Intermodal Business Help Post Strong Quarterly Results

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC), one of the leading railroad networks in the eastern U.S., posted promising results in the fourth quarter 2013, driven by growth in its Merchandise and Intermodal business. Revenues for the fourth quarter grew by 7% to reach $2.9 billion. [1] Intermodal and Merchandise shipments more than offset the 2% decline in coal shipments, resulting in overall volume growth of 4%.  The full year revenue reached $11.2 billion, representing growth of 2%. Revenue per unit volume improved by 3% in the fourth quarter due to improved pricing and increased fuel surcharges.

Net profits increased 24% year on year in the fourth quarter to reach $513 million, resulting in a 26% increase in earnings per share. [1] The increase in net profits was driven by overall volume growth, which outpaced the growth in operating expenses. This resulted in a 4% decline in Norfolk Southern’s operating ratio (operating expense expressed as a percentage of revenues). Operating expenses grew only 1.5% compared to volume growth of 4% due to an increase in compensation and incentive costs and fuel expenses. The full year net profit and earnings per share grew 9% and 12%, respectively.

In 2014, Norfolk Southern plans to invest $2.2 billion for maintenance of safe railway operations, and the purchase of locomotives and freight cars which will help support growth. This will be an increase of 12% compared to 2013. [2] Also, Norfolk Southern recently announced an increase in its quarterly dividends for 2014 by 4%. [3]

See our complete analysis of Norfolk Southern here

General Merchandise Shipments Help Boost Revenue

Norfolk Southern’s general merchandise shipments consist of chemical shipments, which include petroleum products, automotive shipments, metals and construction materials, paper and forest products and agricultural shipments. In the fourth quarter of 2013, general merchandise volume and revenue grew 8% and 12% due to growth across categories. [1]

The factors driving growth in each of the categories are mentioned below:

  • Chemicals volume was up 22% due to the shale boom, which has resulted in increased production of crude oil, natural gas liquids and plastics.
  • Automotive shipments increased 10% driven by growing production of light vehicles in North America and also new business contracts.
  • Agricultural shipments grew 6% due to a strong harvest this season, leading to an increase in soybean and corn volumes.
  • Paper and forest products shipments grew 2% on demand growth for lumber due to the recovery in the housing market and increase in pulp volumes.
  • Metals & construction shipments grew 1% due to increased demand for steel, frac sand and iron driven by the growing shale drilling activities.

Norfolk Southern believes that in 2014, its general merchandise shipments will continue to grow on increasing crude oil production and shale-related volumes. Additionally, the continued growth in automotive production will drive growth in automotive shipments. The strong harvest this season will have spillover effects which will boost agricultural shipments, in turn boosting general merchandise volumes. [2]

Intermodal Shipments Remain A Strong Growth Factor For Norfolk Southern

Norfolk Southern’s intermodal revenue grew 6% year on year in the fourth quarter 2013 to reach $618 million. [1] This was primarily driven by 6% growth in volumes which offset the 1% decline in revenue per unit volume for intermodal shipments.

The expansion and enhancement of its intermodal corridors, such as Crescent corridor, has driven growth in Norfolk’s domestic intermodal volumes, which increased 7% in the fourth quarter 2013. International intermodal shipments grew 6% due to an increase in customers.

The company expects intermodal shipments to grow in 2014. It is investing in adding freight capacity to cater to this growth. Its newest additions to intermodal terminals are the South Carolina Inland Port and the Charlotte terminal. [2]

Coal Volumes Continue To Decline

Norfolk Southern continues to face headwinds in coal shipments. Weak demand across domestic and export coal led to a volume decline of 8% in the fourth quarter 2013. This resulted in a 2% decline in coal revenue which fell to $641 million. [1] Domestic coal volumes continue to bear the pressures of cheap natural gas and an inventory pile-up in the southern utilities. Reduced demand from steel customers added to the pressure. Export coal volumes declined 8% due to decreased demand for U.S. metallurgical coal and weaker foreign currencies.

In 2014, Norfolk Southern expects sluggish demand for domestic coal due to the inventory overhang in the south. Export markets for coal will also be challenging due to weak demand for U.S. metallurgical coal. [2]

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  1. Norfolk Southern Quarterly Financial Review, Jan 22 2014, [] [] [] [] []
  2. Norfolk Southern Management Discusses Q4 2013 Results – Earnings Call Transcript, Jan 22 2014, [] [] [] []
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