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Can Norfolk Southern Recover From Coal's Collapse?

By Dan Caplinger - Apr 19, 2013 at 3:06PM

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The railroad giant aims to diversify its shipping exposure.

Next Tuesday, Norfolk Southern (NSC 0.36%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise.

As a major railroad company, Norfolk Southern gained a substantial amount of business when high fuel prices made rail transportation a more energy-efficient choice for moving goods than alternatives. With a substantial amount of its business coming from coal-mining customers, though, weak coal prices have led to lower shipping volumes for the railroad. Let's take an early look at what's been happening with Norfolk Southern over the past quarter and what we're likely to see in its report.

Stats on Norfolk Southern

Analyst EPS Estimate

$1.17

Change From Year-Ago EPS

(4.9%)

Revenue Estimate

$2.78 billion

Change From Year-Ago Revenue

(0.3%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Norfolk Southern motor ahead this quarter?
Analysts have gotten a bit more optimistic in recent months about their expectations for Norfolk Southern's earnings, boosting their estimates for both the most recent quarter and full-year 2013 by a $0.01 per share. The stock has reacted favorably, rising almost 15% since mid-January.

Geography has separated the railroad industry into haves and have-nots recently, as coal's weak demand has affected some railroads more than others. Because Norfolk Southern and regional rival CSX (CSX 0.00%) both have extensive rail networks in the coal-rich Appalachian region of the eastern U.S., they've traditionally gotten much of their business from shipping coal. CSX cited much lower coal revenue in its earnings report earlier this week, and investors remain concerned about its ability to adapt to changing conditions in the industry.

But one area where Norfolk Southern has potential to expand is in transporting oil from energy-rich shale plays to refineries on the East Coast. Rival Union Pacific (UNP -1.35%) has used that strategy to perfection, reporting better-than-expected earnings this morning despite a decline in its coal volumes. Union Pacific even expects a better overall year in 2013, especially as natural gas prices have risen sharply over the past year. Another major prospect Norfolk Southern has is in helping coal companies boost exports to foreign markets, where the supply-and-demand fundamentals are more favorable.

To that end, Norfolk Southern plans to spend $2 billion on capital projects this year, with a focus on ordinary infrastructure maintenance and replacement, along with engine and railcar overhauls, safety equipment, and terminals and other facilities. That's less than the company spent last year, but still represents an important investment in its future.

In Norfolk Southern's earnings report, be ready to make comparisons to the numbers that CSX and Union Pacific have already reported. Although many macroeconomic trends affect most railroads equally, Norfolk Southern still has the capacity to stand out from the crowd and deliver better performance than its peers.

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Stocks Mentioned

Norfolk Southern Corporation Stock Quote
Norfolk Southern Corporation
NSC
$228.86 (0.36%) $0.83
Union Pacific Corporation Stock Quote
Union Pacific Corporation
UNP
$213.58 (-1.35%) $-2.92
CSX Corporation Stock Quote
CSX Corporation
CSX
$30.94 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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