Norfolk Southern Corporation
) recently provided its third quarter 2012 outlook, with earnings
per share projected in the range $1.18 to $1.25. The company
expects poor coal shipments and lower fuel surcharge to have an
adverse impact on the company's growth. The projections remain
significantly below $1.59 per share earned in the third quarter of
The company expects poor shipments of coal and merchandise
products to offset higher revenue performance of Intermodal
segment. Consequently, they expect this impact to lower revenues by
approximately $120 million from the third quarter 2011 level. Last
year, the company registered an 18% revenue growth to $2.9 billion
in the third quarter.
Further, fuel surcharge revenues would also remain a drag on
revenues resulting in a reduction of $80 million. In the third
quarter 2011, fuel surcharge revenues included a favorable lag
impact of $52 while in the third quarter of this year, it is
anticipated to have an unfavorable lag impact ranging within $25
and $30 million.
Over the past years, railroads have significantly benefited from
the demand for U.S coal in the emerging market. However, coal
volumes registered a setback compared to the second half of 2011
due to lower coal production in the U.S. Consequently, the U.S.
Energy Information Administration (EIA) released a lower coal
production outlook for 2012. EIA projects coal production to
decline 6.1% in 2012 on lower domestic consumption. Domestic coal
demand, of which utility coal accounts for approximately 93%, is
witnessing persistent declines. Lower natural gas prices implied
that gas is largely substituting the demand for utility coal.
Additionally, higher stockpile levels have resulted in lower
utility coal demand.
According to the latest report from EIA, coal consumption by
coal fired power plants is expected to total 829 million short tons
(MMst) in 2012, representing the lowest amount in 20 years. In
terms of export coal, the outlook is not encouraging given the
economic concerns in China and higher stockpile levels and
increased exports from Indonesia and a recovery in the Australian
mines. EIA expects coal exports to decline approximately 16% by
Further, in the Merchandize segment, grain shipments are also
expected to be affected in the near term. Global food grain
production remains impacted by dry weather in Eastern Europe, lower
grain production from major grain exporting countries such as
Russia and Kazakhstan, and a poor monsoon in India. According to
data from the U.S. Department of Agriculture (USDA), grain
shipments through rail until June 2012 were down approximately
43,000 carloads year over year.
Additionally, higher prices of U.S. grain also limited exports
to the global market. The strength in the U.S. dollar and the
economic slowdown due to the European debt crisis are also
adversely affecting the U.S. agriculture and commodities
However, we believe Norfolk Southern is poised to benefit from
strong pricing momentum on the back of growing market demand and
shortage in truckload transportation. We expect the company's
pricing improvements together with productivity gains to offset the
current rail inflation.
Further, we remain encouraged about the company's cost-control
measures. Norfolk Southern is replacing its older and less
fuel-efficient locomotives with new machinery. We expect the new
fuel-efficient locomotives to reduce average fleet age and result
in lower maintenance expenses, driving further cost improvement and
providing competitive edge over peers like
). Further, lower fuel prices are also expected to enhance margins.
Norfolk Southern remains keen on its hiring strategy and expect to
recruit 500 employees this year in approximately eight states to
improve service capabilities throughout its network and support
We are currently maintaining our long-term Neutral
recommendation on the stock. For the short term (1-3 months), the
stock retains a Zacks # 3 Rank (Hold rating)
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