A Quick Snapshot of Norfolk Southern’s Coal Freight Business

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Norfolk Southern

Norfolk Southern (NYSE:NSC) generates its revenues primarily from various commodities freight, including agriculture, coal, metals and  minerals, and intermodal, among others. We have created an interactive dashboard highlighting the company’s coal freight business. You can adjust revenue drivers and income margin for 2018 to see how it impacts the company’s overall revenues and income. Below we discuss our expectations and forecasts for the company.

Why Is the Coal Segment Important For Norfolk Southern?

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The coal segment accounts for 15% of the company’s overall revenues and income. The average price realization for coal freight is 114% of the average price realization across the company, as shown in the chart above. Even in terms of carloads, it accounts for around 17% of the company’s overall carloads, and is thus an important segment for Norfolk Southern’s operations. As such, any meaningful decline in this segment will have a notable impact on the company’s overall performance.

Expect 2018 Coal Revenues To Decline

Coal revenues are dependent on two factors – Number of Units, and Price Per Unit. Norfolk Southern’s coal volume has fluctuated in the recent past, as shown in the chart above. This can be attributed to multiple factors, such as coal export volume and pricing surcharges. While the coal export volume dropped in 2016, it was higher in 2017, and is expected to again decline in 2018. It should be noted that the U.S. Energy Information Administration forecasts a 5% decline in coal production, and a 17% decline in coal exports in 2018. This will likely weigh on railroad companies, such as Norfolk Southern. Accordingly, we estimate a decline of 10% in coal revenues to $1.57 billion, led by declines in both volume and price.

Operating Income Margin Likely To Decline Amid Pricing Woes

Norfolk Southern’s operating income margin has been increasing over the last few years, and amounted to 34% in 2017. However, we forecast it to decline in 2018 amid pricing pressure due to lower volume, especially in the coal segment. We estimate the margins to be around 31% in 2018, translating into operating income of $485 million for the coal segment.

Risks To Our Estimates

There are certain risks to our estimates. For instance, fuel surcharges, which are a component of revenue per unit, are linked to prices of WTI or U.S. On Highway Diesel. Norfolk Southern’s fuel surcharge revenues, to a large extent, are co-related to the oil prices, which are expected to be higher in 2018, as OPEC has committed to production cuts. While we have taken this factor into account in our forecast, it has a potential to boost average price per unit to be better than our estimates, which, in turn, could also impact the operating margins.

Note: Trefis model for Norfolk Southern will soon be updated to reflect the latest forecast, given the industry outlook. As such, the numbers on the interactive dashboard may not match the Trefis’ Norfolk Southern model.

Don’t Agree With Our Forecast? Feel Free To Create Your Own By Making Changes To Our Model

 

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Like our charts? Explore example interactive dashboards and create your own.