What To Expect From Norfolk Southern’s Q1?

by Trefis Team
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Norfolk Southern (NYSE:NSC) is expected to publish its Q1 2019 results on April 24. This note details Trefis’ forecasts for Norfolk Southern, as well as some of the key trends we will be watching when the company reports earnings. You can view our interactive dashboard analysis ~ How Is Norfolk Southern Likely To Have Fared In Q1? for more details on the key drivers of the company’s expected Q1 performance.  In addition, you can see more of our data for Industrial companies here.

How have Norfolk Southern’s revenues changed over recent quarters, and what’s the forecast for Q1 2019?

  • Total Revenues for Norfolk Southern have largely trended higher over recent quarters.
  • Revenues grew from $2.67 billion in Q4 2017 to $2.90 billion in Q4 2018.
  • The growth can primarily be attributed to higher intermodal revenues.
  • We estimate the revenues to be $2.84 billion for Q1; a figure 4% higher than what it reported a year ago.

What are Norfolk Southern’s key sources of revenues?

  • Norfolk Southern generates its revenues primarily from various commodities freight, including merchandise, coal, and intermodal.
  • Intermodal refers to the shipment of containers that can be moved from one form of transport to another.
  • Merchandise freight revenues are derived from the shipment of merchandise commodities, including agriculture, metals, paper, chemicals, and automotive related goods.

How much can Intermodal segment revenues grow?

  • Intermodal segment revenues have grown from $667 million in Q4 2017 to $755 million in Q4 2018.
  • This can primarily be attributed to capacity constraints in the trucking industry amid driver shortage after the full implementation of the ELD Mandate.
  • This trend will likely continue in the near term.
  • We forecast the segment revenues to grow in mid-to-high single-digits in Q1 2019.

How much can Merchandise freight grow?

  • Norfolk Southern’s merchandise freight grew from $1.57 billion in Q4 2017 to $1.68 billion in Q4 2018.
  • This can partly be attributed to higher fuel surcharge in the recent quarters, given the movement in crude oil prices.
  • We forecast the revenues to grow in low single-digits in Q1.
  • This growth will likely be led by chemicals, metals, and forest products, as an expected growth in construction will likely bode well for the railroad shipments.
  • The U.S. construction sector is forecast to grow in mid-single-digits over the next three years.

What to expect from the Coal segment?

  • Coal freight revenues grew from $426 million in Q4 2017 to $457 million in Q4 2019. This can be attributed to higher coal exports.  We forecast the segment revenues to grow in mid-single-digits in the near term.
  • While we expect export to see some growth, domestic coal will likely trend lower. The decline in domestic coal demand can largely be attributed to the trends  in natural gas prices. The benchmark Henry Hub natural gas price is currently trading under $3 levels, falling from the highs of $4.50 in late 2018.
  • With gas prices being more attractive, the dependency on coal as an energy source continues to come down. EIA estimates 603 million short tons (mst) coal consumption in 2019, which will be the lowest coal consumption over the past few decades.
  • Coal exports have been trending higher in the recent quarters, but it may see a slight decline in 2019, thereby impacting the overall volume. However, the segment should benefit from better pricing, as it did in the recent quarters.

What will be the impact of the above on Norfolk Southern’s EPS?

  • We expect the earnings to be $2.20 per share in Q1. This reflects 14% growth to the prior year quarter.
  • The growth in earnings will likely be led by higher revenues, and higher margins.
  • The company is focused on reducing its operating ratio by better managing costs and improving efficiency.
  • Operating ratio stood at 62.8 in the previous quarter, reflecting 550 bps improvement over the prior year period.
  • This should help improve margins and aid the company’s overall earnings growth in the near term.

 

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