A Look At Norfolk Southern’s Intermodal Freight Business

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Norfolk Southern

Norfolk Southern (NYSE:NSC) generates its revenues primarily from various commodities freight, including coal, industrial, intermodal, and agriculture, among others. The Intermodal segment accounts for roughly a quarter of the company’s total value, according to our estimates. We believe that the Intermodal segment will grow at a faster pace in the near term, primarily due to capacity constraints in the trucking industry. We have created an interactive dashboard ~ A Quick Snapshot of Norfolk Southern’s Intermodal Freight Business.  You can adjust the segment revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate. Below we discuss our forecast for the segment.

Intermodal Segment Will Likely See Strong Growth In The Near Term

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Norfolk Southern’s Intermodal segment accounts for roughly a quarter of the company’s total revenues and profits. Intermodal freight refers to the shipment of containers that can be moved from one form of transport to another. The segment revenues have grown in the recent quarters, amid volume gains, and we expect this trend to continue in the near term. The ELD (electronic logging device) mandate being fully implemented, has put a constraint on the capacity of the trucking industry.

It should be noted that the ELD Mandate represents a major regulatory change for the U.S. trucking industry, as the increased costs are passed on to the shippers. Drivers are restricted on the number of hours of service, which has resulted in a reduction in available capacity. While the trucking industry is expected to be hit by this law, other modes of transportation, particularly railroads, are expected to benefit from this.

As shippers move to railroads to ship freight, Norfolk Southern’s Intermodal shipments will likely increase. Also, higher fuel surcharges will aid the pricing growth in the near term. Fuel surcharges are dependent on oil prices, which have been trending higher in 2018, with benchmark Brent trading above $82 levels. Accordingly, we estimate the segment revenues to grow in mid-teens in 2018 to around $2.8 billion. We also forecast growth in the bottom line led by margin expansion.

The company has managed to significantly reduce its operating ratio to less than 65% currently. In fact, this metric improved by 200 basis points in the previous quarter. This should aid the margin expansion in the near term, and boost the earnings.

 

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