- Norfolk Southern will report its Q2 2013 financial results
on July 23, 2013.
- We expect positive volume growth in Q2 2013, on account of
gains in the chemicals, automotive and intermodal segments,
which will be partially offset by weakness in other
- However, we expect challenges on the overall revenue per
unit (RPU) side, due to continued weakness in the coal market
and negative mix in price.
Norfolk Southern (
), one of the leading railroad networks in the eastern United
States, is scheduled to report its Q2 2013 results on July 23,
2013. The company reported an annual revenue decline in the
previous quarter, mainly on account of lower average revenue per
unit as the overall volumes grew during the period.
Norfolk Southern's volume outlook for the second quarter is
mixed as its overall volume showed 2% annual growth during the
first 10 weeks of Q2 2013 (ending on June 8). However, this was
lower compared to 3% annual growth seen in Q1 2013. In Q2 2013, we
expect increased volumes in the chemicals, automotive and
intermodal segments; however, these gains will be partially offset
by challenges in the coal, agricultural, and metal and construction
We believe Norfolk Southern's average RPU will remain under
pressure in Q2, mainly on account of challenges in the coal market.
The negative mix in price caused by higher proportion of shorter
haul Northern utility volumes and export thermal coal could impact
overall RPU during the quarter. Weakness in the export coal market
on account of lower international prices of coal could further
impact RPU. We will closely track profitability and efficiency
gains during the quarter as these will be critical for NSC's EPS
growth in 2013.
See our complete analysis of Norfolk Southern
Recap of Q1 2013 results
Norfolk Southern posted railway operating revenue of $2.7
billion in Q1 2013, which marked an annual decline of 2%. The
revenue decline was caused by 5% decrease in average revenue per
unit as the overall volume rose by 3% annually. Weakness in the
coal business, which showed 17% revenue decline during the quarter
was primarily responsible for this performance.
Norfolk Southern's operating ratio increased to 74.8% in Q1 2013
from 73.3% in Q1 2012. However, its net income rose by 10% annually
in Q1 2013 to $450 million. The strong growth in net income was
partially caused by sale of land, which added $60 million to net
income in Q1.
The company targets more than $100 million in expense savings in
2013, and we will keep a track of the company's progress against
this goal in the quarterly results.
Coal, Agricultural and Metal (and Construction) segments
are expected to present headwinds to NSC in the second
Norfolk Southern's coal volumes declined by 4% during the first
10 weeks of Q2 2013, and hence we expect the coal volume outlook to
be weak in the second quarter. The outlook for coal revenue per
unit (RPU) is also negative for Q2 on account of increased
proportion of shorter-haul Northern utility volumes and export
thermal coal (as compared to export met coal) in the overall
volume, which contributes lower RPU. We expect challenging
conditions in the coal market to persist in 2013 for NSC, owing to
competition from natural gas for electricity generation and
negative mix in price.
NSC's agricultural volumes are expected to post a decline in Q2
2013 due to the carryover from last year's drought, which has
affected soybean, corn and feed shipments. However, this market
could post a recovery in the second half of 2013, driven by easier
y-o-y comparisons and better agricultural output.
Owing to factors such as RG steel bankruptcy, decline in
domestic steel production and challenges in the highway
construction market, we believe NSC's metal and construction
volumes could show a decline in Q2 2013. However, we could see a
slight recovery in this segment in the second half of 2013.
Chemicals, Automotive and Intermodal segments will drive
volume growth in Q2 2013
NSC's chemicals volumes grew at a strong rate of 15% during the
first 10 weeks of Q2 2013. Increased shipments of crude oil by rail
on account of insufficient pipeline infrastructure is supporting
the high demand in this segment. In addition, the shipments of
chemicals and plastics are also rising due to growth in the U.S.
chemicals sector. We expect this segment to post high growth
NSC's automotive shipments are expected to grow at a healthy
rate in Q2 2013, driven by auto sector growth in the U.S. Increased
vehicular production in North America owing to factors, such as
economic recovery and high vehicular age is contributing to growth
in this sector. We expect high demand in this segment throughout
2013; however, difficult y-o-y comparisons could affect the growth
rate in the future.
The intermodal segment represents a long-term growth driver for
Norfolk Southern due to significant truck to rail conversion
opportunity and rising U.S. international trade. We expect strong
growth in both domestic and international intermodal volumes in Q2
Our $76 price estimate for Norfolk Southern's
, is broadly in line with the current market price.
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