Norfolk Southern (NSC, Financial) reported improvements across its key financial metrics last quarter. The reason behind the robust increase in its numbers was higher demand across most of its businesses. The company is pleased with the momentum it is seeing across its business, and it is confident of achieving better results in the future. However, the soft coal segment is a matter of concern for Norfolk, but still, management is confident of a better performance.
A closer look at the segments
Except coal, Norfolk is seeing solid growth opportunities across most of its business units. However, so far the company has met its coal utility forecast. This was mainly due to the higher natural gas prices that drove coal utility. But with the milder than expected weather and lower natural gas prices putting pressure on the coal segment, Norfolk is expecting soft results from coal in future.
Moving on to the intermodal, the capacity in the trucking industry is tightening which is also driving its costs up. This gives bright opportunities to Norfolk for improvement. This is expected to drive growth in the volume in its domestic markets. It will also drive highway conversion and yield improvement across its business. Not only domestically but Norfolk is expecting good growth in the international market mainly on the back of good organic growth and new services. Norfolk is also seeing good growth opportunities in other materials also such as crude oil, natural gas-related products as well as drilling materials such as frac, sand and paper.
End-market conditions
With the recovering U.S. economy, the steel market is expected to be booming in the coming quarters. With this growth in steel, Norfolk is expecting this to benefit the energy and automotive segments also. This will ramp up in the vehicle production, giving bright opportunities at several Norfolk Southern assembly plants.
In addition, in the agriculture segment, the corn and soybean harvest is expected to be at higher levels. This will give good opportunities to Norfolk to improve its domestic markets. This will also be supported by good export opportunities. With the moving time, Norfolk will remain focused on improving service to meet the expectations of its customers, supporting its ability to price to market. Also, Norfolk has an aggressive investment plan in some of the key areas such as equipment, locomotive and its network, aiming at providing better service to the customers in future.
Conclusion
It is focusing now on refining its service delivery to make it noticeable to the customers. This will stabilize its operations, giving long-term growth opportunities to Norfolk in 2015. With the trailing P/E of 16.28, the stock looks reasonable; also its forward P/E of 14.20 shows good earnings growth in near term. But in the next five years, its earnings are growing at a CAGR of just 11.50% which is lower than industry average of 18.17%. Thus, its long-term prospects are quite shaky. Looking at the current valuation levels I would like to suggest the investors definitely include Norfolk Southern in their portfolio for steady returns.
