What To Expect From Norfolk Southern’s Q2?

Norfolk Southern (NYSE:NSC) is set to report its Q2 2018 earnings on July 25, and we expect the company to post steady growth, primarily led by intermodal freight, which jumped 19% (y-o-y) in the previous quarter. We expect the growth to continue in Q2 as well, as the company benefits from capacity constraints in the trucking industry. However, we don’t expect any significant growth in coal freight, as expected gains from higher price realization will likely be offset by lower volume, given the trends in natural gas prices, and an expected decline in the U.S. coal production. We have created an interactive dashboard ~ What Is The Outlook For Norfolk Southern ~ on the company’s expected performance in 2018. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate.

Intermodal Freight Will Lead Norfolk Southern’s Near Term Growth

We expect Norfolk Southern’s Intermodal freight revenue to grow in high single digits in 2018, primarily due to a positive impact from The Hours-of-Service safety regulation for truck drivers, introduced on July 1, 2013, and now being fully implemented, has put a constraint on the capacity of the trucking industry.  This increases the competitive advantage of railroads over trucks. As shippers move to railroads to ship freight, Norfolk Southern’s Intermodal segment should benefit from the same. Also, higher fuel surcharges, among other factors, will likely boost the pricing and margins for the company.  Fuel surcharges are a component of revenue per unit, and are linked to prices of WTI or U.S. On Highway Diesel. Due to an increase in oil prices in 2018, Norfolk Southern’s fuel surcharge revenues are expected to be higher in Q2.

Expect No Growth In Coal Freight While Automotive May See Mid-Single Digit Growth

We expect Norfolk Southern’s coal freight revenues to remain flat in 2018. In the near term, an expected decline in coal production will likely weigh on the segment’s performance. U.S. coal production as well as exports declined by over 3.5% in Q1 2018 (q-o-q). In the first half of the year it will likely see a 2% decline, according to EIA. This will likely impact the shipment volume in Q2. While we expect some growth on the pricing front in the near term, the same will likely be offset by lower volume. It should be noted that coal exports are trending well while industrial and utility coal is seeing declines. In fact, export tonnage was up in low teens in the previous quarter while industrial and utility declined in double digits. This trend will likely continue in the near term. Also, natural gas prices haven’t seen any significant growth this year, and the benchmark Henry Hub is currently trading slightly below the 2017 average. Looking at automotive freight, we expect the revenues to grow in mid-single digits, led by an uptick in automotive shipments, due to a 5% growth in the North America light truck production.

Overall, we expect the company to post earnings of $8.21 in 2018. We forecast a TTM price to earnings multiple of a little under 19x, to arrive at our price estimate of $153 for Norfolk Southern. This implies a discount of over 5% to the current market price.

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