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Norfolk Southern: Is This As Good As It Gets? – Norfolk Southern Corporation (NYSE:NSC)

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Norfolk Southern Train

Supply: Norfolk Southern

The U.S. financial system has been in enlargement mode for a decade now. The enlargement is getting lengthy within the tooth, and when it falters, cyclical shares ought to fall with it. The free fall in RV shipments could possibly be the canary within the coalmine. I consider Norfolk Southern Corp. (NYSE:NSC) and different railroad shares might be weak. For the week ending November 24th, rail visitors and intermodal models have been up three% in comparison with the identical week final yr. Complete carloads have been up 1.7%. Rail visitors for the primary 47 weeks of the yr grew 1.eight %. Rising rail visitors is translating into larger income for Norfolk Southern.

In Q3 2018, the corporate’s freight income of $2.9 billion was up 6% Y/Y. Complete carloads have been up 5%, whereas common promoting worth (ASP) rose 6%.

Norfolk Southern Q3 2018 Revenue

The lion’s share of Norfolk Southern’s non-intermodal quantity was coal, which represented 13% of complete quantity and 28% non-intermodal quantity. Coal quantity declined four%, pushed by plant outages and decreased provide. ASP rose eight% from a positive combine and pricing good points. Norfolk Southern, Union Pacific Corp. (NYSE:UNP) and CSX Corp. (NYSE:CSX) have turn out to be synonymous with coal. The push in the direction of various power might harm coal ASP going ahead.

Chemical compounds income was up 12% as a consequence of higher shipments of crude oil, rock salt and liquefied petroleum fuel. There’s a worry that oil markets could possibly be oversupplied, and this has triggered a fall in oil costs from their October peak. Falling oil costs might additionally mirror a scarcity of demand and recessionary pressures. This might impression gross sales of chemical compounds (16% of Norfolk Southern’s complete income) going ahead.

The corporate’s different segments are uncovered to the development, auto and industrial sectors, which I don’t consider are notably robust. Sans extra authorities stimulus, slowing industrial manufacturing might weigh on rail visitors going ahead. That stated, I see extra dangers to a draw back in rail visitors than catalysts.

EBITDA Margin Stays Strong

Norfolk Southern was the goal of a hostile takeover try by Canadian Pacific Railway (NYSE:CP) within the second half of 2015. The corporate launched into a price containment program that was anticipated to create efficiencies within the a whole lot of tens of millions of dollars. Over the previous two years, Norfolk Southern drove its working expense ratio from 70% to about 65% this quarter. The corporate’s EBITDA margin was 44%, virtually flat Y/Y.

Its working expense ratio shouldn’t be sub-60% like that of CSX or Canadian Pacific, however it’s nonetheless strong. If income and quantity falter, Norfolk Southern could possibly keep its working expense ratio with out sacrificing service ranges. Value containment efforts sound good so long as quantity stays robust. What occurs to margins and repair ranges if income declines? We might quickly discover out.

NSC Is Not Low cost

NSC trades at almost 11x run price EBITDA. A cyclical identify at 10x or larger could possibly be getting ready to being thought-about costly, for my part. The inventory is up 20% Y/Y, however market volatility might harm the share worth. Recessionary pressures might harm rail visitors and earnings within the first half of 2019. This is probably going nearly as good because it will get for Norfolk Southern. Promote the inventory.

Disclosure: I/we’ve got no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

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