Norfolk Southern (
), one of the leading railroad networks in the eastern U.S., is
scheduled to report its Q3 2013 results on October 23. While the
overall volume outlook is positive, we expect the company to face
challenges on the revenue per unit (RPU) side. The overall volume
will be driven by growth in chemicals, automotive, intermodal and
housing-related shipments. However, challenges such as lower
volumes of export coal and longer-haul Southern utility coal could
lead to a decline in the overall RPU in Q3.
We expect the company to also face profitability pressure in the
third quarter, due to changes in product mix carried by the
company. NSC's railway operating ratio rose to 70.2% in Q2 2013 as
compared to 67.5% in Q2 2012, and we will closely monitor this
metric in the earnings results.
See our complete analysis of Norfolk Southern
Recap Of Q2 2013 Results
NSC's operating revenue declined by 3% annually in Q2 2013 to
$2.8 billion, due to 5% fall in average RPU, which was partially
offset by 2% increase in overall volumes. Headwinds in the coal
market were mainly responsible for the decline in the overall RPU
as coal RPU fell by 14% in Q2. The overall volumes rose owing to
strength across the intermodal, chemicals, automotive, and housing
Coal Market Headwinds To Persist In The Third Quarter
We expect the coal market to present both volume and RPU related
challenges for NSC in the third quarter. Low coal volumes will be
caused by reduced demand for electricity generation, high inventory
stockpiles in the Southern utilities, as well as subdued demand for
U.S. thermal and metallurgical coals in the international market.
Further, pricing challenges in the export coal market coupled with
lower volumes of longer-haul Southern utility coal will put
pressure on coal RPU during the quarter.
Intermodal Segment Will Continue To Grow
We expect NSC to show growth in the intermodal segment in Q3
owing to continued highway-to-rail conversions along with the
company's initiatives to expand its capacity in this segment. The
international intermodal segment could also show increased volumes
due to increased business with existing customers.
Chemicals, Automotive And Housing-Related Shipments Could
Boost Revenue Growth In The Merchandise Segment
We expect the results in the merchandise segment to be led by
gains in the chemicals, automotive and housing-related
- NSC's chemicals and petroleum products shipments is expected
to post growth owing to expansion in the U.S. oil and gas
industry, as well as increase in crude oil by rail
- Automotive shipments are also forecast to increase
substantially due to growth in North American light vehicular
- Increased construction activity combined with the housing
recovery being seen in the U.S. is expected to boost shipments of
products such as crushed stone, sand, gravel, stone, clay, etc.
Housing starts grew by 19% annually in August 2013 and this trend
is expected to continue in the future.
- We think the agricultural grain shipments will continue to
bear the impact of the last year's drought in the third quarter.
The outlook in the agricultural market is expected to improve in
the fourth quarter with increase in the crop output.
Our $74.30 price estimate for Norfolk Southern,
represents nearly 5% downside tothe current market price.
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