Intermodal Will Likely Continue To Drive Norfolk Southern’s Near Term Growth

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC) reported a strong quarter, with earnings growth of 46%, led by a double digit growth in the Intermodal segment, which continued to benefit from tightening truck capacity. In addition, the company was able to reduce its operating ratio by more than 200 basis points, which aided the bottom line. Coal freight saw mid-single digit growth, as the decline in utility coal was more than offset by higher export volume. Looking forward, we continue to believe that the Intermodal segment will see strong growth in the near term, given the trends in the trucking industry. Also, fuel surcharges will aid the pricing, given the growth in oil prices. We have created an interactive dashboard ~ A Quick Snapshot of Norfolk Southern’s Q2 Performance And Trefis Estimates For 2018 ~ 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 Segment Will Likely Continue To See Strong Growth In The Near Term

Norfolk Southern’s Intermodal segment is seeing volume as well as pricing gains, and we expect this trend to continue in the near term. The ELD (electronic logging device) mandate 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, as well as some of the Merchandise shipments, should increase. Looking at the company’s EBITDA margin, we expect it to improve in the near term, as the company continues to reduce its operating ratio, which stood at 64.6% in Q2 2018. The company has been focused on reducing its operating ratio, and it has achieved its aim of bringing down the figure to under 65%. Norfolk Southern’s peer CSX Corporation was also able to significantly cut down its operating ratio to a record 58.6% in Q2 2018, and this suggests that there could be more room for Norfolk Southern to improve the metric in the coming years.

Expect Coal And Chemicals To See Mid Single Digit Growth

The company is also seeing an uptick in Coal freight, led by higher export coal volume. The industry is seeing a decline in volume on the utility coal front while the export is seeing robust growth. In fact, for the first half of 2018, Norfolk Southern’s utility coal tonnage was down 7%, while the export tonnage was up 17%, which aided the overall segment growth. This trend will likely continue in the near term, and we forecast a mid-single digit segment revenue growth for the full year. The company will also benefit from higher fuel surcharges. Oil has been trending higher in 2018, due to several geo-political concerns, among other factors. This has translated into higher surcharge revenue for railroad companies, and we expect this trend to continue in the near term, as oil prices are expected to remain higher, when compared to the 2017 average. Oil production is also expected to be at a record 10.8 million barrels per day in the U.S. This will bode well for the chemicals industry, and boost the shipments for railroad companies.

Overall, Norfolk Southern’s Q2 earnings were better than the Street estimates, with continued cost cutting measures. We believe that the Intermodal segment will be the key growth driver for the company in the near term.  We now expect the company to post earnings of $9.00 in 2018. We forecast a TTM price to earnings multiple of around 19x, to arrive at our price estimate of $172 for Norfolk Southern, which is slightly above the current market price.


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