Norfolk Southern's Wide Moat Remains on the Rails
Coal may still be in long-term decline, but positive near-term trends have led us to boost our fair value estimate.
We increased our Norfolk Southern (NSC) fair value estimate to $109 from $104 per share after incorporating both full 2016 financial details from the firm’s 10-K filed this week, and our increased near-term volume expectations based on the January continuation of fourth-quarter improvements. We hold fast our expectation that the firm can reach a 65% operating ratio by 2020, and maintain our wide economic moat rating.
We still believe coal is in a secular decline at the rails, but based on recent results which we attribute to current higher prices of natural gas and export coal (both lapping easy comparisons) we believe coal cars will increase 6%-8% in 2017. But due to a couple of shorter haul trends in the mix, revenue per unit is likely to decline. The former marks a revision from our prior expectation of a mid-single-digit volume decline this year. Norfolk’s coal declined 16% in 2016, at double-digit levels in the first three quarters, then just 4% in the fourth. We now model 2017 overall volume to improve about 3% and revenue per unit to expand 1%, versus respective declines of 6% and 3% in 2016 (and fourth-quarter declines of just 1% in revenue and 3% in revenue per unit). Leading our volume expectation is intermodal, where we expect the firm to grow international containers 3% and domestic 5%. This compares with fourth-quarter growth of 8% and 10% in domestic excluding discontinued Triple Crown products.
Keith Schoonmaker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.