One of the leading North American railroads -
Norfolk Southern Corp.
) is expected to bolster its sand shipments upon the construction
of a transloading facility at HOST terminal in Horseheads, New
York. The new construction at HOST claims to drive shipments higher
with five times faster unloading facilities, implying upto 100
freight cars within 48 hours.
HOST terminal, jointly owned by Carriage House Partners and RLB
Holdings, is now undergoing the last leg of construction of a $20
million, 90,000-square-feet facility that will begin operations by
of this month. The terminal once completed is expected to emerge as
a key distribution centre in the Marcellus Shale region. The new
construction along with another recently built 90,000-square-feet
facility will serve as a transloading centre for Norfolk
Given the strategic location of HOST in the key industrial
region like Marcellus Shale, we expect its infrastructural
development to bode well for freight railroads like Norfolk
Southern. Since 2009, the company has been using this terminal for
freight transloading and in a couple of years it registered a
significant growth in operations. Norfolk Southern began with
operations of unloading 104 railcars, which reached approximately
2,600 cars by 2011.
Marcellus Shale stretches across the Appalachian Basin through
New York, Pennsylvania, Ohio and West Virginia and contains some of
the highly rich natural gas reserves. Given its proximity to key
industrial markets in the North Eastern region, higher investments
in building rail infrastructure would ultimately translate into
higher shipments for railroads, especially in the absence of
adequate pipeline infrastructure.
The downturn in the coal shipments have diverged rail carriers'
interest into other freight products. Railroads' major focus now
happens to be on tapping potential opportunities in petroleum and
natural gas markets given their current demand trend. Not only are
the core products like petroleum and natural gas winning more
businesses but ancillary products such as frac sand, which is used
in drilling activities to extract oil and gas is also emerging as a
key freight product for railroads. As a result, most of the
railroads' infrastructural development and investments are directed
toward improving shipments in these product categories.
Apart from external developments like HOST, Norfolk Southern has
taken up several railroad development projects under its own wings.
The company's major intermodal corridor initiatives (Heartland,
Crescent, Meridian, and Titusville) are likely to boost its
intermodal capacity and are expected to bode well for shipments in
petroleum as well as in other product categories. The company
targets completion of approximately 4 to 5 intermodal terminals in
2012, including terminals in Birmingham, Greencastle, Pennsylvania
and Mechanicville that come under its Crescent corridor project.
The new terminals are expected to provide access to new markets and
enhance capacity approximately by 15.0%.
Overall, the company targets to spend around $2.4 billion on
these capital projects. About $134.0 million of these investments
are expected to be directed toward intermodal infrastructure in the
Atlanta region. Investments in new projects this year will revolve
around the Birmingham Atlanta network and the north-south line
between Chattanooga and Cincinnati.
Further, the company will continue to fund public-private
partnerships such as Crescent Corridor and CREATE. Investments in
these projects would involve $322.0 million, of which approximately
50% will be directed toward the ongoing projects in the three
Crescent Corridor terminals in Tennessee Alabama and
However, we believe heavy investment in a distressed market
condition coupled with a looming global economic outlook could
weigh on the company's current operational performance. Further,
the company faces stiff competition from other railroads like
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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