Norfolk Southern: Wait for a Turnaround

Norfolk Southern (NSC) shares have lost a lot of value this year as railroad companies have suffered on account of weakness in the end market due to low coal and crude shipments. Last quarter, Norfolk’s revenue was down 11% year-over-year, and it posted net income of $433 million, down 23% from last year.

The railroad company reported a decline in both its top and bottom lines, primarily due to poor coal volumes and weak fuel surcharges for the quarter.

What gives? 

The contraction in railway volumes is a headwind for Norfolk.
Overall volumes until September 12, 2015 have dropped to 1.4734 million units, down 4% from 1.5281 million units during last year. However, general merchandise volume increased by 1%, with significant expansion in chemicals volume, somewhat offsetting reduction in steel volumes. Paper and automotive volume grew with enhanced vehicle production and notable demand for lumber and pulpboard.

Improved shipments in the company’s global business enhanced its complete volume expansion of nearly 2% during the quarter as against the same period last year. However, coal volumes declined 21% owing to a fall of 38% in export and 23% in domestic utility. Further, Norfolk has also recovered the train speed and thus allowing the company to quickly transport the materials to their destinations, illustrating the efficiency of its operations.

Norfolk is believed to be significantly impacted by the recent downturn with notable year-over-year declines in both revenue and volume of the goods carried for the quarter which is however, forecasted to recover gradually with time being supported by significant restructuring operations at Norfolk.

Some positives                 

Norfolk has continuously improved its quarter-over-quarter performance since the start of the fiscal year 2015. However, the weekly comparison indicates a sharp decline after the increasing third quarter results during the beginning of the quarter mainly due to headwinds from the declining fuel surcharge for the quarter.

The railroad major is focused on strategically allocating its capital resources to accelerate growth while offering improved shareholder returns and in line with its commitment to control non-core expenditures, deliver superior combined service performance.

Norfolk recently completed the strategic acquisition of 282 miles of the Delaware & Hudson Railway Co.’s (D&H) line between Sunbury, Pa., and Schenectady, N.Y. This significant deal worth $214.5 million enhances options for key rail carriers and supports local communities.

Norfolk is expected to continuously grow its operations through the planned new acquisition of strategic rail line while delivering on its commitment to offer improved shareholder returns through new share repurchase program.

Conclusion

But, despite such a steep drop in Norfolk’s share price, it will be wise for investors to avoid the stock despite the improvements that it is making. This is because Norfolk has a debt-burdened balance sheet with a total debt of $9.67 billion as compared to a weaker cash position of $889 million.

However, Norfolk is fairly valued with trailing P/E and forward P/E ratios of 12.83 and 12.40 respectively, though the gap between the forward and trailing P/E’s is minimal. Looking ahead, I believe that investors should wait for a turnaround in Norfolk’s performance before buying it for the long run.
Published on Oct 2, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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