A Snapshot of Norfolk Southern’s Business And Outlook

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC) generates its revenues primarily from various commodities freight, including coal, industrial, and agriculture, among others. The Intermodal segment accounts for roughly a quarter of the company’s overall revenues. We believe that the Intermodal segment will grow at a faster pace in the near term, primarily due to capacity constraints in the trucking industry. We have created an interactive dashboard ~ What Are Norfolk Southern’s Key Sources of Revenue.  You can adjust the revenue 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 accounts for roughly 25% of the company’s total revenues. Intermodal freight refers to the shipment of containers that can be moved from one form of transport to another. The segment revenues have grown in the recent quarters, amid volume gains. In fact, the segment volume was up in high single digits in H1 2018, 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 shipments will likely increase. We forecast the segment revenues to grow in low teens in 2018, led by gains in both volume and pricing.

Coal Freight Revenues Will Likely Trend Higher Led By Exports

Coal freight accounts for around 17% of the company’s total revenues. The segment revenues have declined over the past few years, due to lower natural gas prices, which has impacted the overall demand for coal. The revenues grew last year led by an increase in export volume. Export coal has been doing well for railroad companies in the recent past, and has offset most of the decline seen on utility coal. Norfolk Southern’s utility coal tonnage was down 7%, while the export tonnage was up 17% in H1 2018, and this has aided the overall segment growth. We expect this trend to continue in the near term. We currently forecast a mid-single digit growth in segment revenues in 2018, led by both volume and pricing gains. Note that average revenue per carload for most of the segments will likely trend higher in the near term, given the uptick in oil prices. Oil has been trending higher in 2018, due to several geo-political concerns, among other factors. This will likely translate into higher surcharge revenue for railroad companies.

Chemicals Freight Will Likely See Mid-Single Digit Growth

The Chemical Freight segment accounts for over 15% of the company’s total revenues. The segment over the last couple of years has been facing pressure on the volume front, given a decline in the chemical shipments. However, the pricing has seen some growth during the same period, which has aided the segment revenues. Looking forward, we forecast the segment revenues to grow in mid-single-digits in the near term. The chemicals shipments should see an uptick, as the U.S. chemicals production is expected to grow by over 3% in 2018 and 2019. Note that the 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. Higher fuel surcharge will also aid the pricing growth.

The company’s other segments include agriculture & consumer products, metals & construction commodities, paper, clay & forest products, and automotive, which combined accounts for around 40% of the company’s overall revenues.


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