What To Expect From Norfolk Southern’s Q3

Norfolk Southern (NYSE:NSC) is set to report its Q3 2018 earnings on October 24, and we expect the company to post steady growth, primarily led by intermodal freight, which jumped 20% (y-o-y) in H1 2018. We expect the growth to continue in the near term, as the company benefits from capacity constraints in the trucking industry. We also forecast mid-single digit growth in coal and agriculture freight, led by higher exports. We have created an interactive dashboard ~ What Is The Q3 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 earnings and price estimate.

Coal Freight Revenues Will Likely See Mid-Single Digit Growth In Q3

We expect Norfolk Southern’s coal freight revenues to grow in mid-single digits, led by both volume and price gains. While we expect utility and industrial coal volume to continue to decline, export volume should see significant growth, similar to the trend seen in the recent quarters. In fact, export coal tonnage was up in high teens in the first half of 2018, while utility and industrial tonnage was down 7% and 3%, respectively, during the same period. The U.S. coal export is seeing growth due to a rise in global benchmark coal prices. This has supported the demand for U.S. coal, and this trend will likely continue in the near term. The U.S. coal exports were up 30% to 70.5 mmt (million metric tons) in the first eight months of 2018, and they could total over 105 mmt for the full year, marking the highest level since 2012. This should bode well for the railroad companies. However, for the full year we forecast only a mid-single digit growth in the coal freight revenues, given that the overall coal production in the U.S. is expected to see modest decline in 2018, given the domestic coal consumption could see a 2% dip, according to EIA.

Expect Intermodal And Agricultural Freight To See Mid-Single Digit Growth

We expect strong growth for the company’s intermodal freight revenues. The segment is seeing steady growth in both volume and pricing of late, due to the capacity constraints in the trucking industry. The ELD (electronic logging device) mandate being fully implemented, has led to a shortage of drivers. The U.S. economy could add around 55,000 new trucks, subject to availability of trucks and drivers, to keep up with the current demand, according to a research report. Given the driver shortage, railroads are benefiting as manufacturers look for other transportation avenues. Q3 and Q4 in particular will be important for the railroad companies, as it is the peak season for manufacturers preparing for the December holidays.

Looking at agriculture freight, we forecast mid-single digit growth in the near term, primarily led by higher exports. Also, recently the Trump administration announced the increased use of ethanol in gasoline, which should bode well for the industry at large. Looking at pricing, it should see growth for most of the segments, as higher crude oil prices will result in higher fuel surcharges for the company. The Brent crude is currently trading around $80 per barrel, and there are reports suggesting it could move even higher towards $100 a barrel in the coming months.

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