This Railroad Company Can Deliver Strong Long-Term Growth

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Oct 22, 2014

Norfolk Southern (NSC, Financial) reported excellent financial results for the second quarter 2014, driven by strong growth across all of its business segments and effective cost control measures. Its earnings for the second quarter rose about 23% as the company benefitted from robust growth in the automotive and industrial shipments. The company particularly saw higher shipments for metal and construction, chemicals and agricultural products. Also, its performance was fueled by an elevated boost in its coal segment that registered a 7% increase in its overall shipment after a frigid winter season.

Better times expected

Norfolk posted revenue of $3.04 billion, an increase of 9% from revenue of $2.8 billion in the same quarter last year. Its top line performance also topped the consensus estimates of $3 billion for the quarter. Also, its net income for the quarter rose 21% to $562 million or earnings of $1.79 per share, as compared to $465 million or earnings of $1.46 per share in the same period a year earlier. Its earnings were better than $1.71 per share estimated by the consensus for the quarter.

Looking ahead, the company is seeing a rise in the natural gas prices that should enhance its performance for its coal segments in the second half of the year. Also, the company remains quite optimistic about the overall economic condition in the remaining half that should drive its growth going forward. It should additionally benefit from the enhanced market condition in the end markets such as natural gas liquids, crude oil, intermodal, coal, metals, construction, and auto.

In addition, the company is implementing various initiatives that should bring flexibility and stability in its network velocity. It is improving the associated network infrastructure and executing best-in-class intermodal network that should enhance its performance in the second half.

Moreover, the company is seeing more activities in highway conversions across most of its business segments that should improve its domestic volume. Also, the company remains on track to acquire various truck load customers through its intermodal platform that should enhance its organic growth going forward. It expects its coal shipment to augment for the rest of the year with high gas prices and reload stock piles. This should lead to increase in its volume and create better pricing opportunity for the company in the domestic market.

More tailwinds

The company should also benefit from the strong demand for commodities associated with natural gases like frac sand and liquid petroleum gases. Also, the steel production in the United States is expected to rise approximately 3% this year, which should drive growth for these markets under its metal segment. Norfolk additionally should benefit from the increased car supply and production in its automobile segment that continues to improve this year. The favorable growing conditions under its agriculture segment such as strong soy bean and corn corps should supplement growth for its shipment in the last two quarters of the year.

Apart from these, the company will certainly take away a larger piece under its household segment, which is expected to grow 15% this year. It is witnessing augmented volumes for various housing commodities such as soda ash for glass manufacturing, plastics for carbon, synthetic gypsum for wallboard, steel for appliances, and aggregates and asphalt for paving. Furthermore, the company should make the most of the recent data associated with the housing and construction segments. As per one of the reports by Reuters, “the economists had forecasted new home sales rising to a pace of only 440,000 units last month. Compared to May of last year, sales were up 16.9 percent, indicating some momentum in the new homes market.”


Norfolk Southern is seeing strong growth across its entire segments coupled with strong economic conditions that should drive its growth going forward. Moreover, the analysts have anticipated CAGR of 11.13% for the next five years that indicate certain growth for the stock in the long run. The stock is currently trading at the trailing P/E of 17.14 and forward P/E of 14.22 that highlights fair valuation for the stock that has plenty of rooms to grow in the future. Also, its PEG ratio of 1.45 expected for the next five years continues to support its growth over the coming years.