- Norfolk Southern's earnings fell by 10% in 2012 due to a
17% decline in coal freight revenues.
- Despite this decline, coal freight still contributed 26% of
Norfolk Southern's total revenues in 2012.
- The slowdown in coal has primarily occurred due
to decline in natural gas prices, which is now being used for
utility (electricity) generation.
- Export coal demand also slowed as world GDP only grew by 3%
in 2012. GDP is expected to again grow at 3% in 2013.
- If total coal freight shipments in the United States fall
to 5.5 million due to low natural gas prices and low export
demand in 2013
Norfolk Southern's (
) earnings took a 10% hit in 2012, primarily due to a decline in
coal freight revenues which fell by 17% year-over-year. Despite
this slowdown in coal freight, NSC's coal division still raked
in 26% of the firm's total revenues and makes up around a quarter
of the company's total value. We think that NSC's reliance on coal
freight is likely to suppress bottom line growth in 2013, as low
natural gas prices and a slowdown in coal export demand will hurt
coal freight demand during the year.
See our complete analysis of Norfolk Southern
Coal Use for Utilities Declining
Norfolk Southern's coal freight business is primarily reliant on
coal used for generating electricity; coal for utilities made up
approximately 65% of the coal that Norfolk Southern shipped in
2012. Utility coal tonnage fell by 17% in 2012, as low natural gas
prices caused a substitution away from coal when it comes to energy
production. This substitution of coal is troubling for NSC because
if natural gas prices stay depressed for an extended period,
utility companies could start shifting a material part of their
electricity production to natural gas permanently. If this occurs,
Norfolk Southern's coal freight demand might not recover in the
coming quarters, hurting the firm's revenues through 2012.
Coal Export Demand Will Also Slowdown
As can be seen from the table above, demand for coal export also
slowed down during 2012, as weakness in the Chinese economy, the
European Union and the United States ensured that global growth
remained muted. Global growth fell to approximately 3% in 2012, and
is expected to remain at this level in 2013.
However, it is important to note that global growth could miss
these 3% estimates in 2013. The Euro crisis has yet to see an end,
and the outcome of the situation continues to remain uncertain.
European GDP contracted 0.6% during Q4 2012, the third straight
quarter of decline and the largest since Q1 2009. This situation,
combined with the slowdown in China and India is likely to have a
negative effect on worldwide coal demand. We currently estimate
that U.S. carloads of coal will fall to approximately 6.40
million in 2013, but if this number falls further to 5.5 million,
we would see around 5% downside to our price estimate.
We currently have a
$63 price estimate for Norfolk Southern
, which is approximately 15% below the current market price.
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