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Image: Norfolk Southern.

The railroad industry has gone through tough conditions lately, and Norfolk Southern (NYSE:NSC) has been one of the railroads that has felt the pinch of the difficult environment the most. With its geography leaving it more exposed to the falling prospects for coal than many of its peers, Norfolk Southern has had to find other ways to try to keep its fundamentals from deteriorating. Rival Union Pacific (NYSE:UNP) has taken a hit from coal's woes, but it also managed to top earnings estimates because of record efficiency levels. With Norfolk Southern preparing to release its third-quarter financial report Wednesday, the railroad needs to demonstrate its ability to adapt to changing trends and find new ways to recover from some of the setbacks it has suffered recently. Let's take a closer look at what investors should expect Norfolk Southern this quarter and whether shareholder concerns are warranted.

Stats on Norfolk Southern

Analyst EPS Estimate

$1.41

Change From Year-Ago EPS

(21%)

Revenue Estimate

$2.70 billion

Change From Year-Ago Revenue

(10.7%)

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Can Norfolk Southern earnings build up steam?
In recent months, investors have had a gloomier outlook on Norfolk Southern earnings, slashing their third-quarter estimates by more than a dime per share and cutting their projections for this year and next by 5% to 7%. The stock has also been under pressure, falling about 5% since late July.

Norfolk Southern's second-quarter earnings report showed just how much pressure the railroad has been under lately. Revenue fell almost 11%, and net income suffered an even steeper decline as weakness in metals and construction combined with more than 20% drops in coal volume to make a big dent in Norfolk Southern's top and bottom lines. Falling fuel surcharges have led to the extreme drops in revenue, and actual savings in diesel haven't been enough to overcome the downward impact of smaller customers payments to cover fuel costs.

One place where Norfolk Southern can look for better performance is in internal operational efficiency. At Union Pacific, average train speeds hit their fastest level in nearly two years, and that helped reduce operating costs and contributed to a favorable reduction in the railroad's operating ratio. By reducing delay times at terminals and by looking to ensure more on-time arrivals and departures, Norfolk Southern can work at getting its operating ratio down and becoming a leaner and more efficient company.

In addition, Norfolk Southern needs to try to emphasize its opportunities in more successful sectors. For instance, automobile shipments have been a much-needed source of strength in offsetting not just coal's woes but also some of the chemicals and other necessary raw materials needed for oil and gas production, and Union Pacific's latest results suggest that those trends could continue into the future.

Yet new regulations could further hamstring some of Norfolk Southern's business prospects. In late October, the railroad said that it would no longer ship commodities that qualify as poisonous inhalation hazards as of the beginning of December, and passenger and commuter-rail trains will no longer operate on Norfolk Southern track after the end of the year because of Positive Train Control requirements that are taking effect in 2016. Norfolk hopes that a delay in implementation of the regulations will give it enough time to install PTC equipment safely and correctly, but even if this situation gets resolved favorably, calls for further regulation in other areas pose a constant threat to Norfolk Southern, Union Pacific, and all of their railroad peers.

In the Norfolk Southern earnings report, it'll be important to figure out whether the railroad is keeping up with Union Pacific and other railroad competitors in getting the best possible mix of business to reflect changing macroeconomic conditions. With specific geographical challenges that have left it more exposed to coal's difficulties than other railroads, Norfolk Southern has to try that much harder to get itself into better shape going forward and stem the declines in its stock price. Only then will it be able to match the earnings beats that Union Pacific has posted recently.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.