- Norfolk Southern's top line recorded an annual decline of
4% and 7% in Q4 2012 and Q3 2012 respectively.
- Its volume declined by 1% in the last two quarters owing to
14% drop in coal shipments which was offset by 5% increase in
- Its RPU fell by 5% and 3% annually in Q3 2012 and Q4
2012, and we feel this factor is discomforting as other
railroads such as Union Pacific were able to offset volume
decline with price rises.
- NSC's profitability also fell in the last two quarters
owing to increase in railway operating ratio.
- We believe challenges in the coal market will continue to
present headwinds to NSC's volume and RPU growth in 2013.
Norfolk Southern (
) is the leading railroad network in the Eastern United States
engaged in the rail transportation of raw materials, intermediate
products and finished goods. In 2012, its revenues stood at $11
billion with an operating margin of 28%. Owing to challenging
conditions in the coal market, the company's top line
faced continuous pressure during 2012. Unlike other
railroads such as
), the company was unable to offset volume decline with price
rises.Its profitability also declined during 2012, due to a higher
railway operating ratio.
Going forward, we feel challenging conditions in the coal market
will continue to impact its volume and revenue per unit in the
coming future. In addition, the expansion in its operating ratio
will affect its bottom line in 2013.
See our complete analysis of Norfolk Southern
Norfolk Southern's revenue recorded an annual decline of 4% and
7% in Q4 2012 and Q3 2012, respectively. Weakness in the coal
business was the main factor responsible for this decline as
revenues from its coal business dropped by around 22% in the last
two quarters. Lower volume and a declining average revenue per unit
have both contributed to this lower revenue.
Norfolk Southern's volume declined by 1% annually in the last
two quarters. While coal shipments were lower by around 14% in the
period, a 5% rise in intermodal shipments curbed some of the
decline in overall volume. We expect challenging conditions in the
coal market to weigh on Norfolk Southern's overall volume in
Decreasing Average Revenue Per Unit
Norfolk Southern's revenue per unit fell by 5% and 3% annually
in Q3 2012 and Q4 2012, respectively. We feel this RPU decline is
especially troubling as other railroads such as Union
Pacific were able to offset volume declines with price rises.
If the company is not able to reverse this trend in the future, we
feel NSC's revenues will further decline in the coming
Norfolk Southern's bottom line was hit harder than its top line
in the recent period. Its net income dropped by 14% and 27%
annually in Q4 2012 and Q3 2012, respectively. An increase in the
railway operating ratio has contributed to this decline in
profitability. Its railway operating ratio grew from 71.4% in Q4
2011 to 73.4% in Q4 2012. While the company announced cost-cutting
initiatives in the latest earnings call, we will have to wait and
see how this will impact its profitability in the coming
Weakness in Coal Market To Persist
Coal shipments account for around 26% of Norfolk Southern's
revenue and contribute for around a quarter of its value. Owing to
reduced demand by domestic utilities as well as lower export
demand, the company saw a decline in coal shipments throughout
Coal for utilities comprised for 65% of the coal that Norfolk
Southern shipped in 2012. However, the demand for coal by utilities
has decreased as they are increasingly shifting to cheaper
natural gas for producing electricity. Utility coal tonnage fell by
17% in 2012, and we feel that if natural gas prices continue to
remain low, then NSC's coal freight business will remain
constrained in the coming future.
Coal exports which account for 18% of the coal transported by
Norfolk Southern recorded a marginal decline in 2012. Going
forward, we feel coal exports will continue to stay under pressure
due to uncertainty in the global economy. We currently
forecast U.S. carloads of coal to decrease to around 6.40
million in 2013, but if this figure declines further to 5.5
million, it would represent 5% downside to our price estimate.
We currently have a
$64 price estimate for Norfolk Southern
, which is approximately 13% below the current market price.
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