Source: Norfolk Southern.
Shareholders are happy with the performance that railroad giant Norfolk Southern Corporation (NSC 0.42%) has put in recently, climbing to record highs as the industry emerges from an especially difficult period. But even with things looking brighter for rail transportation, Norfolk Southern has some obstacles to overcome to convince investors that its strong stock performance is justified. Let's look at three of the most significant factors that could send shares of Norfolk Southern falling in the near future.
1. If trends toward less coal use continue, Norfolk Southern will have to work harder than some of its peers to make up the lost shipping volume elsewhere.
One key question Norfolk Southern faces is whether coal will bounce back from its recent declines, as the company's proximity to the important coal-producing areas of the Appalachian region gives it a natural advantage over Union Pacific (UNP 0.99%) and railroads without a similar road map in the eastern U.S. The future trend of coal hasn't been entirely clear lately, with coal volume falling 13% during the first quarter but bouncing back by 3% in the second quarter. Yet in the past several years, revenue from coal has dropped sharply, and it now accounts for only about a fifth of Norfolk Southern's overall revenue.
Lately, the United Nations summit on climate change has put pressure on shares of coal producers. With several policymakers seeking restrictions on coal use across the world, the strategy toward greater coal exports that Norfolk Southern, CSX (CSX -0.14%), and other railroads have hoped to take advantage of might not see the demand that investors want. If the long-term market prospects for coal are failing, then Norfolk Southern will have to work especially hard to keep growing.
Source: Norfolk Southern.
2. Any unanticipated safety problems could hurt Norfolk Southern's reputation.
The unfortunate fact of rail transportation is that derailments happen. Most of the focus on railroad safety lately has come from the rise in the number of crude-oil trains moving through the country, with much attention going to a serious accident in Lynchburg, Virginia, in which a CSX train derailed and caused an oil spill and fire. Yet despite heightened sensitivity about crude transport, other derailments can cause problems as well. For instance, a Norfolk Southern accident in north-central Pennsylvania in July resulted in 10 coal cars derailing and four of them spilling coal onto the side of the track.
If accidents continue to occur, then greater regulation of railroads could make transporting essential items such as crude oil more onerous and less profitable. Slower speeds, shorter trains, and other restrictions can improve safety, but they come at the cost of reduced efficiency and higher costs. Many optimistic investors believe regulators will keep the health of the railroad industry in mind when crafting new rules, but if safety concerns rise, Norfolk Southern and its peers could see further pressure ahead.
3. The crude-oil bonanza could dry up in the long run.
Source: Norfolk Southern.
The boom in domestic energy production has helped Norfolk Southern in several ways. Not only have railroads taken on the task of shipping crude oil itself, but they've also benefited from providing chemicals and other necessary materials for energy companies to drill for and extract crude oil.
Yet in the long run, pipeline construction is a threat to crude-oil rail transport. Despite the sluggish pace of building new pipelines, even Warren Buffett, whose company owns major railroad Burlington Northern, believes that pipelines like the controversial Keystone XL cutting across the nation's midsection are a good idea for the country as a whole.
The big question is whether existing shale oil plays will keep seeing production rise, or whether companies will have to move regularly to new areas to tap resources. If areas keep producing long enough for pipelines to be built economically, then it could once again take away a key revenue source for Norfolk Southern.
Despite the record run in Norfolk Southern stock, these factors could hold back the shares in the future. Norfolk Southern investors need to stay aware of these dangers in order to avoid nasty surprises down the track.
