Why We’re Raising Our Price Estimate For Norfolk Southern To $107

by Trefis Team
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Norfolk Southern’s stock price has increased considerably since the U.S. presidential election held in November 2016. President-elect Trump’s stated economic policies are likely to translate into an improved business environment for the company going forward. Whereas higher economic growth in the U.S. is likely to boost rail shipments across commodities, improved business environments for coal, steel, and petroleum-related commodities are likely to boost rail shipments of these commodities too, which were characterized by sharp declines in shipments in 2016. This has prompted us to revise various forecasts in our model for Norfolk Southern, translating into a new price estimate for the company’s stock.

Improved Business Outlook

U.S. rail shipments of coal fell roughly 20% in 2016, as a result of weak demand for the commodity from utilities. [1] Subdued natural gas prices over the course of 2016 accelerated the shift towards natural gas as the preferred fuel for thermal power plants, translating into a decline in rail shipments of coal. However, the President-elect has promised to revive the fortunes of the coal industry by rolling back prohibitive environmental regulations which increase the costs of coal mining. [2] Besides a potentially friendlier policy environment under the new White House administration, an increase in natural gas prices in 2017 is likely to support the demand for coal from thermal power plants. As per EIA estimates, benchmark natural gas prices are expected to average $3.27 per MMBTU in 2017, around 30% higher than in 2016. [3] As a result of these developments, we have altered our forecasts for U.S. rail shipments of coal. The following graph illustrates our new forecast, which envisions 12% higher shipments by 2023, the end of our forecast period.

Apart from the improved outlook for coal shipments, steel and crude oil will also be characterized by more favorable business conditions from 2017 onward. The domestic steel industry has suffered as a result of competition from cheap steel imports over the past couple of years. U.S. regulatory authorities took action during 2016, imposing antidumping duties on a number of countries dumping steel into the U.S. [4] Moreover, President-elect Trump has promised to create a level playing field for domestic steelmakers, taking a tough stance on the issue of unfair imports. [5] In addition, the President-elect’s plans for a $1 trillion revamp of domestic infrastructure is expected to boost the demand for steel going forward. [6] We have suitably modified our forecast for rail shipments of metals and construction commodities, reflecting the improved business conditions.

In addition to the favorable business environment for steel, oil prices are expected to average higher in 2017 in the wake of a production cut by OPEC nations. [7] This is expected to boost drilling activity in the U.S., which will benefit Norfolk’s Chemicals Freight division, under which it classifies its crude oil shipments.

In addition to the changes to the aforementioned forecasts, we have also suitably modified our pricing and margin forecasts, reflecting the improved business outlook for the company. Taken together, these modifications to our forecasts have translated into our new $107 price estimate for Northern Southern, indicative of the more favorable business environment for the company.

Have more questions about Norfolk Southern? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Norfolk Southern

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Notes:
  1. U.S. Rail Traffic Data, Association of American Railroads Website []
  2. Trump’s big plan for the coal industry just got even harder, CNBC []
  3. Short Term Energy Outlook, EIA []
  4. US issues final antidumping duties for hot-rolled coil steel from seven nations, Platts []
  5. Trump packs trade team with veterans of steel wars with China, Reuters []
  6. Trump’s $1 Trillion Promise vs. Congress, Wall Street Journal []
  7. OPEC Agrees to First Oil Output Cut in Eight Years, Bloomberg []
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