Norfolk Southern Corporation
) is slated to report its second-quarter 2014 financial results on
Jul 23. In the last reported quarter, the company delivered a 2.63%
earnings surprise. Let's see how things are shaping up prior to
Factors Influencing Results this Quarter
Despite persistent weakness in export coal volumes, Norfolk
Southern is riding high on gains from the Merchandise and
Intermodal segments coupled with a better outlook for utility coal.
Apart from witnessing volume gains in most of its segments, the
company expects improving macroeconomic condition to drive growth
across several of its businesses.
Also, Norfolk Southern's relentless focus on expense management
is expected to boost operating ratio, which was up 40 basis points
(bps) year over year to 75.4% in the first quarter. Meanwhile,
Norfolk Southern is concentrating on foraying into new markets by
collaborating with customers and maintaining above inflation price
levels. Thus, we believe that the company is positioned to gain
from its superior service and network capabilities, infrastructural
investments and increased efficiency in the intermodal network
aided by strong freight pricing.
In the coming days, Norfolk Southern expects growth mainly on
the back of strong Intermodal and Merchandize shipments, which can
largely offset the weakness in the Coal segment. The Merchandize
segment is expected to benefit from increased crude and frac sand
shipments, along with shipment of shale-related liquid petroleum
Further, Automotive shipments also slated to rise as North
American vehicle production is projected to grow around 3% in 2014
with an expected production of 17 million vehicles. Meanwhile,
increased steel usage in auto and construction sectors will likely
boost domestic steel production by 5% in the year. Growth in the
housing market will also boost lumber and related wood products
In addition, Norfolk Southern expects favorable grain crop and
stronger ethanol market to drive agricultural shipments in the
remaining part of 2014. Intermodal, on the other hand, will
continue to benefit from new businesses arising from truckload
conversion to rail intermodal services and improvement in
international shipping patterns.
The company also remains committed to improve service and
efficiency across its double stack network. Moreover, the expected
in 2014 enhances the prospects of growth in utility coal while new
business gains might drive industrial coal volumes.
However, the near-term growth of Norfolk Southern is expected to
be tempered by weak export coal volumes that continue to hit
revenues. Further, management expects low export coal volumes owing
to weak commodity pricing and intensified foreign competition.
We believe coal volumes continue to be hurt by oversupply and a
competitive global coal market. Further, the domestic metallurgical
coal market is also expected to remain under pressure due to plant
closure and sourcing shifts. Within the Merchandize segment, paper
and forest divisions will face significant challengesowing to
shrinkage in graphic paper construction.
Our proven model projects that Norfolk Southern is likely to
beat earnings this quarter.This is because a stock needs to have
both a positive
and a Zacks Rank #1, 2 or 3 for this to happen. We caution against
stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the
earnings announcement, especially when the company is seeing a
negative estimate revision momentum.
Earnings ESP, which represents the difference between the Most
Accurate estimate and the Zacks Consensus Estimate, stands at
+0.58% for Norfolk Southern.
Norfolk Southern carries a Zacks Rank #2 (Buy), which further
supports the predictive power of ESP.
Other Stocks to Consider
Here are some other companies to consider within the
transportation sector as our model shows that these have the right
combination of elements to post an earnings beat this quarter:
American Airlines Group Inc.
) with an earnings ESP of +1.56% and a Zacks Rank #1 (Strong
Genesee & Wyoming Inc.
) with an earnings ESP of +0.89% and a Zacks Rank #2.
Bristow Group, Inc.
) with an earnings ESP of +7.41% and a Zacks Rank #3 (Hold).
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