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January 23, 2012
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Norfolk Southern Corp. (NSC), one of the leading rail transportation companies in the U.S., is slated to release its fourth quarter 2011 results on Tuesday, January 24, after the closing bell. The current Zacks Consensus Estimate for the fourth quarter is pegged at $1.40 per share, representing an annualized growth of 39.74%.
Third Quarter Flashback
Norfolk’s third quarter financial results surpassed the Zacks Consensus Estimate and came in above the year-ago level backed by strong pricing and shipment across all segments.
Revenue was in line with the Zacks Consensus revenue estimate and grew 18% year over year to $2.9 billion buoyed by higher revenue per unit and fuel price recoveries.
Agreement of Estimate Revisions
Estimates for the fourth quarter have reflected a positive bias over the last 30 days. Over the last 30 days, out of 23 analysts, 11 analysts moved upward while only three made downward revisions.
Similar trend has been witnessed for fiscal 2011 and 2012. For fiscal 2011, out of 23 analysts, 10 analysts increased their estimates in last 30 days but three decreased the same. For fiscal 2012, out of 25 analysts, six analysts moved upward while two moved in the opposite direction.
Similar to other railroads like CSX Corporation (CSX), we believe that Norfolk’s upward projections reflect the positive sentiment of the market regarding the railroad stocks given favorable pricing trend. We expect this momentum to continue in fourth quarter and beyond based on growing demand for rail intermodal services. In the domestic and premium intermodal markets, higher pricing and shipments will be driven by continued truckload conversions, and pricing improvements. In addition, widespread interest in intermodal as a less carbon-intensive alternative to truck will aid market share gains in intermodal along with new business opportunities.
Product wise, agriculture and automotives look attractive. Agricultural products are likely to benefit from the growing ethanol network. To improve services and productivity in agriculture business, management purchased 2,100 new grain hoppers in October. In the automotive category, a projected gain of 14% in light vehicle production will boost automotive production to approximately 14 million vehicles in fiscal 2011. Additionally, the automobile assembly plant in Chattanooga, Tennessee, will also drive further shipments. Further, the recovery of Japanese suppliers after the twin disasters in March is also likely to aid automotive volumes.
The company’s coal segment has also exhibited significant growth in the past quarter of 2011 and remains a significant revenue driver. However, an expected downfall in the export coal demand will likely result lackluster coal shipment compared to the sequentially preceding quarter.
Magnitude of Estimate Revisions
Over the last 7 and 30 days, the magnitude of the fourth quarter estimate has inched up by a penny and a couple of cents, respectively, to $1.40.
For fiscal 2011, the Zacks Consensus Estimate increased a penny to $5.36 and was up by 2 cents over the last 7 days and 30 days, respectively.
For fiscal 2012, no change was registered in the last 7 days but estimates moved up 2 cents to $6.00 in the last 30 days.
Earnings Surprises
With respect to earnings surprise over the trailing four quarters, Norfolk outperformed the Zacks Consensus Estimate with an average of 5.30%.
The current Zacks Consensus Estimates for the fourth quarter and 2011 remains neutral but carries a 0.33% downside risk in fiscal 2012.
Our Recommendation
Norfolk remains well positioned to gain from strong pricing trends and continued volume growth in its key businesses, underpinning continued margin and earnings growth over the long term. We remain encouraged by the company’s all-time best operating ratio performance.
The company continues to benefit from highway conversion of intermodal freight from truck to rail as well as healthy global demand for export coal. Its long-term prospects remain attractive with enhanced service offerings, supporting increased productivity, market share gains and accelerated growth across all its business segments. Going forward, we believe the company’s strong balance sheet with strong free cash flow will encourage investments for its expansion plans and enhance shareholder value through high returns
However, our outlook on Norfolk depends on near-term headwinds such as lower coal demand projection and soaring fuel cost, thus affecting margin. Further, intense competition from other leading railroads such as Union Pacific Corporation (UNP) and CSX Corp. as well as regulatory issues surrounding the rail industry also contribute to our cautious stance on the company
We have a long-term Neutral recommendation on Norfolk Southern, supported by a Zacks #3 (Hold) Rank.
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