Will Norfolk Southern (NSC) Beat Earnings This Season? - Analyst Blog

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Norfolk Southern Corporation ( NSC ) 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 this announcement.

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 gases.

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 shipment.

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 rise in natural gas prices 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.

Earnings Whispers?

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 Earnings ESP 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.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.58% for Norfolk Southern.

Zacks Rank: 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. ( AAL ) with an earnings ESP of +1.56% and a Zacks Rank #1 (Strong Buy).

Genesee & Wyoming Inc. ( GWR ) with an earnings ESP of +0.89% and a Zacks Rank #2.

Bristow Group, Inc. ( BRS ) with an earnings ESP of +7.41% and a Zacks Rank #3 (Hold).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: NSC , AAL , GWR , BRS

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