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Norfolk Southern (NSC)
Norfolk Southern: Reminding Us That Trains Do Matter
Thinking of the railroad industry usually conjures up images of aging locomotives spewing black smoke into the air and an endless line of cars pulled behind an aging engine. Many would consider the age of the train to be dying off as fleets of semi-trucks race from coast to coast, fulfilling our desire for quickly-delivered goods. Amazingly, for one of America's oldest industries, railroads are whole-heartedly embracing technology to improve shipping times and increase reliability. Norfolk Southern is no stranger to innovation, having spent millions of dollars in high-tech upgrades. In such a rapidly-evolving world, how does the company plan on staying on top of the competition?
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For a company with a history extending back to the 1800s, Norfolk Southern has certainly been trying to shake the public's preconceptions of an aging railway. The Norfolk, Virginia-based company formed in 1990 after a series of acquisitions and name exchanges and now controls roughly 21,500 miles of track in 21 states. Agreements with other railroad companies allow it to operate over a total of 38,000 miles of track in all. That's a considerable amount of coverage, helping the company push a significant amount of goods from the east coast to Dallas. Much of the company's success (23% of total traffic) comes from the transport of coal from West Virginia, which is moved to steel mills and other manufacturing facilities across the globe. With emerging economies – especially China – increasing the demand for coal year on year, this sector shows enormous opportunities for growth. Many consider coal to be another form of “black gold” as demand outpaces supply. Coal prices have jumped from a little over $25/ton to over $40 per ton since 2003.
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With increased demand for coal, Norfolk Southern's ability to deliver products faster and more reliably than competitors is going to be a major factor in the company's ability to continue its operations. With the sheer logistics of directly operating on over 20,000 miles of railway and managing nearly 200,000 engines and railroad cars looming, the use of computers, GPS and other technology has become an integral part of the company's business. Even the amount of fuel remaining in an engine can be digitally recognized and reported to station managers, who can determine if refueling is necessary. The company uses mainframe computers and hundreds of servers to manage the complicated movement of material from one station to another, allowing time to be shaved off by days instead of by minutes. As more and more goods are delivered to the Eastern seaboard, the ability of NS to manage transportation effectively becomes increasingly important. The company is in the process of upgrading its line from Norfolk, VA, to Columbus, OH, in order to ensure that its cars can handle increased loads from east coast ports. The price of the upgrade: a hefty $100m.
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Investors aren't shying away from the cost of big upgrades. Many see the spending spree as a sign that the railroad industry is finally embracing the technology that will ensure their viability for years to come. The company went through an explosive period of growth from 1990-1998, jumping from a little over $2 to nearly $40. After a brief falling out after the dot-com bubble, the company is poised for resurgence. Since 2003, shares have surged from $20 to over $50. Year on year revenue growth is over 17%, and NS is an industry leader in operating margins. Growth isn't limited to NS, as major competitors Burlington Northern Santa Fe (BNI: Charts, News, Offers), CSX (CSX: Charts, News, Offers) and Union Pacific (UNP: Charts, News, Offers) have also been showing impressive numbers.
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In order to sustain growth, Norfolk Southern must stay on top of technology. It is currently in the process of acquiring new, million-dollar engines to bolster its fleet, but must ensure that these engines are going to be worth it as the price of fuel continues to rise. The company must embrace partnerships with other freight types, such as trucking companies, in order to ensure seamless planning and timing of good transportation. Effectively linking sea transportation (like Neptune Orient) with its train system and its train system with trucking companies will allow companies to track their goods from point to point, increasing demand and reliability. Slowing growth doesn't seem to be a problem on the horizon.
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Profile |
The Company's principal activities are to provide transport of raw materials, intermediate products and finished goods through rail. The freight of the Company is classified into market groups of coal, automotive, chemicals, metals, paper, clay, forest products, agriculture, consumer products, government and intermodal. The Company operates approximately 21,500 miles of road in the states of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, the District of Columbia and in the Province of Ontario, Canada. The Company owns about 11,707 miles of road and the balance is operated under lease or trackage right. The Company also transports overseas freight through several Atlantic and Gulf Coast ports.
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