Updated Research Report on Norfolk Southern - Analyst Blog

On Mar 20, 2014, we issued an updated research report on leading freight service provider Norfolk Southern Inc. NSC. The company posted stellar fourth-quarter 2013 results, beating the Zacks Consensus Estimate on both the lines. The company will likely benefit from favorable pricing revisions, continuous investments in infrastructure and abundant opportunities within the transportation business sector.

We remain encouraged by Norfolk Southern's growth across its Intermodal and Merchandise segments. Merchandize is expected to benefit from crude, frac sand and shale-related liquid petroleum gases' shipment. Automotive shipments will also boost the segment owing to increased vehicle production in North America that is projected to grow around 3% in 2014. Further, increased steel usage in auto and construction sectors will boost this year's domestic steel production by 5%.

On the other hand, Intermodal will continue to benefit from new businesses arising from truckload conversion to rail intermodal services and improvement in international shipping patterns. Norfolk Southern also remains committed to improve its service and efficiency across its double stack network. The company will also benefit from construction of new facilities and launch of new services like the South Carolina Inland Port project at Greer and Charlotte terminal facility.

The Norfolk, VA based company remains committed to develop new markets, invest in infrastructure capacity and provide the most cost efficient service to its customers. The company aims to generate over $100 million in productivity and leverage gains in 2014. Additionally, Norfolk Southern remains committed to enhance its shareholder returns and recently raised its quarterly dividend.

However, a weak coal business continues to hurt the company's revenues. Excess stock piles in Southern utility coal and stiff competition from natural gas continue to hurt the Coal segment. Going forward, management expects coal demand to remain weak despite a 2% increase in electricity demand in the last quarter.

Further, the export coal market is also expected to remain under pressure due to the challenging environment within Atlantic metallurgical coal, sluggish demand and excess supply of thermal coal. Though small, the expected increase in depreciation expense could affect the company's bottom line in 2014.  

Currently, Norfolk carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked stocks within the industry are Dynagas LNG Partners LP DLNG, The Greenbrier Companies Inc. GBX and Trinity Industries Inc. TRN. All these stocks carry a Zacks Rank #2 (Buy).