Expect Norfolk Southern To See Double Digit Earnings Growth In 2019 Led By Intermodal

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC) recently posted a better than expected Q4 performance with a 9% top line growth and over a 50% surge in the adjusted earnings, led by continued cost cutting measures, along with better pricing across its segments. Q4 growth was primarily led by its Intermodal segment, which saw double digit revenue growth. Merchandise and Coal also grew 7% each. Looking forward, we expect mid-single digit top line growth and low double digit earnings growth for the company in 2019, primarily led by continued growth in the Intermodal segment.  We have created an interactive dashboard ~ A Quick Snapshot of Norfolk Southern’s Q4 Performance And Trefis Estimates For The Full Year 2019 ~ on the company’s expected performance in 2019. You can adjust various drivers to see the impact on the company’s overall earnings and price estimate. Below we discuss our forecast in detail.

Expect Revenues To Grow In Mid-Single-Digits

We expect Norfolk Southern’s Coal freight revenues to grow in mid-single digits led by both volume and price gains for the full year 2019. The company saw strong export coal volume growth in 2018. In Q4, even utility coal was higher, amid trends in natural gas prices. We expect export to drive the company’s coal freight revenues higher in the near term. However, any significant growth is unlikely, given that exports are estimated to cool down in 2019 and 2020 from current record levels of 110 mst (million short tons). Export coal in the recent past has benefited from higher global benchmark coal prices, which were up roughly 15% in 2018. On the domestic side, consumption continues to fall. EIA’s estimate of 640 mst coal consumption in 2019, would be the lowest figure since 1979. The company has managed to see higher revenues on coal, primarily benefiting from improved pricing, and higher fuel surcharge revenues.

We forecast mid-single digit growth in Merchandise freight, primarily led by chemicals, and metals. We forecast a growth in construction related shipments in the near term. Total construction starts climbed 7% and 3% in 2017 and 2018, respectively. The growth is expected to be slow in 2019, amid rising interest rates and higher material costs. However, the economy is also expected to see expansion, which should bode well for the construction sector. We also expect Automotive freight revenues to see low to mid-single digit growth, led by higher shipments. Total number of vehicles sold has been hovering around 17 million over the past few years, and it could remain around the same mark in 2019 as well.

Looking at Intermodal, we forecast the revenues to grow in high single-digits for the full year 2019. The segment has seen strong growth in the recent quarters. This can be attributed to volume and pricing gains, benefiting from continued capacity constraints in the trucking industry. This trend will likely continue in 2019, in our view. The overall top line growth is also dependent on the trends in fuel prices, which have been softer in Q4. We forecast further expansion in margins, as the company remains focused on bringing down its operating ratio. This combined with share repurchases will likely result in a low double-digit growth in earnings to around $10.60 per share in 2019, according to our estimates. Our price estimate of $180 for Norfolk Southern is based on a 17x forward price to earnings multiple.

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