What’s Happening With Norfolk Southern’s Coal Freight Business?

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[Updated: Jan 4, 2022] NSC Stock Update

Coal shipments have been trending higher for railroad companies, including Norfolk Southern (NYSE:NSC) over the recent quarters. The year 2021 marked a sharp rebound in economic activities, resulting in a surge in demand for oil and natural gas. The prices for both the fuels have seen a spike in 2021, with the U.S. WTI crude averaging $68 per barrel, reflecting 74% growth from the previous year average of $39, and the natural gas price for electricity generators rising more than 2x to $4.99 MMBtu (Metric Million British Thermal Unit), compared to $2.40 average for 2020. [1]

This directly impacts the demand for coal. A rise in natural gas prices means its reduced usage as an energy source, compared to coal, and vice-versa. The overall demand for coal remained robust in 2021, with the total production rising 9% and it is expected to rise 6% in 2022, owing to the trends seen in natural gas prices. Higher production has meant increased demand for railroads. For Norfolk Southern, total volume has seen a rise of 18% to around 500K for the nine month period ending Sep 2021. This clubbed with a 7% rise in average revenue per unit, has meant a sharp 27% rise in coal freight revenue to a little under $1 billion.

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Overall, Norfolk Southern’s coal freight revenues are likely to see continued growth in the near term. Oil prices are expected to average similar to levels seen in 2021, while natural gas prices are likely to average higher as per the EIA. Now, despite the recent rise, coal freight revenue is still well below the levels seen in 2019, due to the impact of the pandemic on the overall railroad business in 2020. Coal freight alone accounts for nearly 12% of the company’s total revenues. Our dashboard on Norfolk Southern Revenues offers more details on the company’s business segments. We also compare Norfolk Southern’s revenue growth with its peers in Norfolk Southern (NSC) Revenue Comparison dashboard.

Wondering how does the top-line expansion translate into bottom-line growth? Explore Norfolk Southern Net Income Comparison for more details on the company’s bottom-line and its comparison to its peers.

Below you’ll find our previous coverage of NSC stock where you can track our view over time.

[Updated: Oct 7, 2021] NSC Stock Rise

Last month we discussed that based on its historical performance Norfolk Southern (NYSE: NSC) stock will likely see higher levels, after falling 3% in a week. While UNP stock has risen 7.5% in last five trading days, it is up nearly 6% from the levels of $248 it was at nearly a month ago. The recent rise can be attributed to broader market gains with Republicans now lending support on the debt ceiling issue to avoid a national default. There was also some positive data, such as better than expected employment levels in September, that aided the broader sentiment toward railroad stocks, with other companies such as CSX Corporation and Union Pacific also seeing over 5% gains in last five trading days.

Given this movement of 7.5% in a week, Norfolk Southern stock price forecast is 1.4% gains (to $266) over the next one month, based on the Trefis Machine Learning Engine. That said, we continue to believe that there is much more room for growth in NSC stock. While there are near term challenges due to rising input costs, higher fuel prices, and wages, which may impact the margin growth in the near term, it is likely that these incremental costs will be passed on to the customers. As the economy continues to open up gradually, the demand for railroads is expected to rise, bolstering Norfolk Southern’s top-line growth.

Looking at the full-year 2021, we forecast revenues to grow 12% to around $11 billion, and net margins to expand nearly 600 bps compared to 2020, which saw a larger impact of the pandemic on the company’s business. This clubbed with a lower number of shares outstanding, due to share repurchases (around 5.7 million shares repurchased in the first half of the year), EPS is expected to rise 49% y-o-y to $11.70. Going by our Norfolk Southern Valuation of $304 per share, based on $11.70 EPS and 26x P/E multiple, there is more than 15% upside potential from its current levels of $263. The 26x figure is below the 30x levels seen for NSC in 2020, and it is also largely in-line with Norfolk Southern’s peers, including Union Pacific and CSX Corporation.

 

[Updated: Sep 7, 2021] NSC Stock Decline

The stock price of Norfolk Southern (NYSE: NSC) reached its all-time high of around $295 in May before a recent sell-off resulting in NSC stock falling to $250 levels currently. NSC stock has declined over 3% in the last five trading sessions. The stock prices of other railroad companies, including CSX and UNP, also saw losses of over 2% in the last week. The railroad companies have seen a rebound in demand over the recent quarters but the rise of Covid-19 cases over the last couple of months may impact the overall earnings growth in Q3. But will NSC stock continue its downward trajectory over the coming weeks, or is a recovery in the stock imminent?

According to the Trefis Machine Learning Engine, which identifies trends in the company’s stock price using ten years of historical data, returns for NSC stock average 2% in the next one-month (twenty-one trading days) period after experiencing a 3% drop over the previous week (five trading days). But how would the returns fare if you are interested in holding NSC stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Norfolk Southern stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!

MACHINE LEARNING ENGINE – try it yourself:

IF NSC stock moved by -5% over five trading days, THEN over the next twenty-one trading days NSC stock moves an average of 2%, with a reasonable 64% probability of a positive return over this period.

Some Fun Scenarios, FAQs & Making Sense of Norfolk Southern Stock Movements:

Question 1: Is the average return for Norfolk Southern stock higher after a drop?

Answer: Consider two situations,

Case 1: Norfolk Southern stock drops by -5% or more in a week

Case 2: Norfolk Southern stock rises by 5% or more in a week

Is the average return for Norfolk Southern stock higher over the subsequent month after Case 1 or Case 2?

NSC stock fares better after Case 1, with an average return of 2.1% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 1% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Norfolk Southern stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Norfolk Southern stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For NSC stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

You can try the engine to see what this table looks like for Norfolk Southern after a larger loss over the last week, month, or quarter.

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks – although NSC stock appears to be an exception to this general observation.

It’s pretty powerful to test the trend for yourself for Norfolk Southern stock by changing the inputs in the charts above.

While NSC stock may rebound, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Kansas City Southern vs Canadian Pacific Railway.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 NSC Return -2% -2% 102%
 S&P 500 Return 0% 0% 79%
 Trefis MS Portfolio Return 0% 0% 292%

[1] Month-to-date and year-to-date as of 1/4/2022
[2] Cumulative total returns since 2017

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