Norfolk Southern: Hitching a Ride on Economic Recovery

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It’s counterintuitive in this age of jet and truck-based shipping, but railroads not only remain a valuable means of transporting goods. They’re also barometers of overall economic activity. Since the dawn of the American industrial revolution, as goes the economy, so go the railroads.

Railroad track points 630
Source: iStockphoto

That said, publicly traded railroad companies are in many ways just like any other cyclical transportation stock. They prosper when times are good and tend to fall during economic downturns. Those who want to invest in railroad operators as “recovery plays” must choose wisely.

A particularly promising railroad investment now is Norfolk Southern Corp. (NSC), a company that possesses inherent underlying strengths that cushion it from future bumps down the tracks.

A Vast Network

Based in Norfolk, Virginia, Norfolk Southern controls a vast rail network that dominates the eastern seaboard of the United States with lines that stretch from New York to Florida and all the way west to the storied transportation hub of Kansas City, Missouri. Norfolk Southern also enjoys a long-time shipping dominance in Appalachian coal-producing states, from the coalfields of West Virginia to the terminus docks on the eastern shore.

As vital, rail-dependent industrial sectors such as automotive manufacturing and construction pick up steam, Norfolk Southern stock should take investors for a profitable ride.

Norfolk Southern’s rail routes pose high barriers to entry for any competitor, giving the railroad enormous pricing power. If you need to transport bulk commodities, NSC is practically the only game in town.

Norfolk Southern also has been adapting its rail network to transport more freight that’s “intermodal,” an innovative shipping method by which standardized containers can be easily adapted to rail, truck and ship transport. According to a report from the American Trucking Associations, intermodal rail will continue to be the fastest growing freight mode, growing an average of 5.1% a year until 2018. Norfolk Southern made an early bet on intermodal technology and it’s paying off.

NSC: All Aboard for Gains

Norfolk Southern reported in late October that third quarter 2014 revenue reached $3.02 billion, an increase of 7% compared to the same quarter a year ago, propelled by volume growth across all commodities except for coal. Demand for coal remains soft because of environmental regulations and export markets that are not only slowing but transitioning away from coal to reduce pollution. However, demand for other commodities is more than making up the slack.

Importantly, Norfolk Southern’s third quarter operating ratio, which measures operating expense as a percentage of revenue, hit 67%, a 4% improvement over the same year-ago quarter, which in turn fueled a 16% year-over-year boost in net income.

A lock on the eastern industrial and economic hubs of America, combined with routes that extend deep into the southern agricultural heartland and mid-Atlantic coalfields, give Norfolk Southern an incomparable advantage as a safer transportation play. The railroad’s farsighted investment in intermodal shipping and continued cost-cutting make Norfolk Southern stock a stable ride to strong investment returns.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/12/norfolk-southern-nsc-hitching-ride/.

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