How Important Is Merchandise Freight For Norfolk Southern?

by Trefis Team
Norfolk Southern
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Norfolk Southern (NYSE:NSC) generates its revenues from its coal, merchandise, and intermodal freight. Merchandise is the largest segment for Norfolk Southern, and it accounts for roughly 60% of the total revenues. The segment includes freight from automotive, agriculture, chemicals, metals, and other construction related shipments. The contribution of merchandise freight to the company’s overall sales will likely see modest declines in the coming years, with the intermodal segment expected to grow at a faster pace. In this note we discuss the importance of the merchandise segment for Norfolk Southern. We have created an interactive dashboard ~ How Important Is Merchandise Freight For Norfolk Southern’s Stock? You can adjust various drivers to see the division’s impact on the company’s earnings. Also, here’s more Industrials Data.

Merchandise Revenues Have Seen Steady Growth

Merchandise freight revenues have increased in recent years from $6.2 billion in 2016 to over $6.7 billion in 2018. The growth was led by higher volume and average revenue per carload.  2018, in particular, benefited from higher crude oil prices, which resulted in higher fuel surcharge revenue for Norfolk Southern. Looking forward, we expect a mid-single-digit growth for all of the sub-segments. Total construction starts climbed 7% and 3% in 2017 and 2018, respectively. While the growth is expected to be slow in 2019, amid rising interest rates and higher material costs, the economy is expected to see expansion, which should bode well for the construction sector. As such, metals and construction related commodities, along with forest products, should drive the near term volume growth. It will be interesting to see the trends in automotive freight revenues. Total number of vehicles sold in the U.S. at 17.33 million last year marked the fourth highest figure. However, the same is expected to slow down in the coming years, and it could impact the overall shipments for the railroad companies. Looking at agriculture freight, the overall volume growth could be slow in the near term, given the trends in the U.S. wheat and soybean export, amid the foreign tariffs.

Merchandise’s Contribution To Norfolk Southern’s EPS

We use adjusted net income margin of around 24%, similar to that of Norfolk Southern overall, to arrive at $6.17 contribution to the company’s total earnings. To understand the contribution to Norfolk Southern’s stock price, we use around a 17x forward price to earnings multiple, and arrive at a $107 figure, which accounts for roughly 60% of our stock price estimate for Norfolk Southern. Our forward price to earnings multiple for Norfolk Southern is more or less around the same mark for that of the overall sector.



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