What Factors Drive Our $194 Price Estimate For Norfolk Southern

by Trefis Team
Norfolk Southern
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The growth in the Intermodal segment, and the company’s focus on reducing its operating ratio are the key factors that drive our $194 price estimate for Norfolk Southern (NYSE:NSC). The company continues to see steady revenue growth, primarily led by strong growth in its Intermodal freight business. The segment is benefiting from capacity constraints in the trucking industry, and we expect this trend to continue in the near term, and drive Norfolk Southern’s earnings growth. Among other segments, Coal will likely benefit from the continued growth in export shipments, while Chemicals will see higher shipments related to crude oil and plastics. In addition, the company has reduced its operating ratio to 65% in Q3, and the company expects it to come down further, which will aid the bottom line. We have created an interactive dashboard ~A Look At Our $194 Price Estimate For Norfolk Southern ~ on the company’s expected performance in 2018. You can adjust the drivers to see the impact on the company’s overall earnings and price estimate.

Intermodal Segment Will Likely Continue To See Strong Growth In The Near Term

Our price estimate of $194 for Norfolk Southern is based on expected adjusted EBITDA of $19 per share for the full year 2018, and a price to EBITDA multiple of around 10. Our EBITDA forecast reflects growth in low teens over the prior year. This can be attributed to higher revenues as well as growth in the company’s margins. We forecast a high single digit growth in the company’s overall revenues, primarily led by its Intermodal segment.

Norfolk Southern’s Intermodal segment has seen volume gains of late, and we expect this trend to continue in the near term. This can be attributed to continued driver shortage amid full implementation of the ELD mandate, which has put capacity constraints in the trucking industry, and manufacturers are looking for alternative means of transport. Apart from Intermodal, the chemicals and coal freight will also aid the near term revenue growth for the company. While coal continues to see lower volume on the utility side, export has been strong for railroad companies, offsetting the revenue declines on the utility side. We expect this trend to continue in the near term, given the rise in global benchmark coal prices, which is favoring the exports. Note that the overall U.S. coal exports are on track to achieve the highest level since 2012. Looking at chemicals, the segment is benefiting from higher crude oil and plastics shipments, and this trend is expected to continue in the near term. There has been an overall increase in the plastic production in the U.S. Also, the U.S. crude production is at a  record high, surpassing 11 million barrels per day in August.  These factors will bode well for Norfolk Southern, and drive its revenue growth in the near term.

Looking at the EBITDA margin, we forecast slight growth for the full year, as the company continues to cut its costs, and improve its operating ratio. Note that the company’s operating ratio stood at 65.4% in Q3 2018, similar to the levels in the prior year quarter. However, there has been a notable improvement in Q1 and Q2. The company has been focused on reducing its operating ratio, and aims to bring down the figure to under 65%. This should aid the overall bottom line growth.


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