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Hop Aboard Norfolk Southern

NSC is rolling along and should keep picking up speed

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Norfolk Southern (NYSE:NSC), among my top picks for November, is one of the nation’s premier rail transportation companies, operating approximately 20,000 route miles in 23 states. It serves every major container port in the Eastern U.S. and provides connections to many of the country’s other rail carriers.

Norfolk is the product of more than 200 railroad mergers, reorganizations and consolidations over the last 150 years. Its rich history began in 1838 with a nine-mile stretch in Virginia. Now, at $25 billion in market cap, Norfolk is the fourth-largest rail carrier in the U.S., with over $9.5 billion in annual revenues.

Most of the major rail carriers are as profitable now as they’ve ever been. Decades of consolidation have resulted in the top four carriers generating over 80% of total revenues, and despite the competitive structure, they often share joint ventures, resources and equipment among one another.

The Staggers Act of 1980, much like the Airline Deregulation Act of 1978 before it, largely deregulated the rail industry and allowed rail carriers to establish any rate they wanted if adequate competition existed in the area. Make no mistake, the railroad system in the U.S. is still subject to regulation, and this heightens the importance of competitive advantage and strong management, something Norfolk excels at.

Norfolk Southern NSC stock chart

With barriers to entry nearly impossible to overcome, operating efficiency, rail location and freight mix separate good railroads from great ones. I believe Norfolk is set up to benefit greatly over the next several years.

It has an ideal freight mix, separated into three categories: coal, general merchandise and intermodal. Coal represents 31% of operating revenues and is up 28% in 2011 from a year ago.

General merchandise, which largely represents automotive parts, consumer products, construction and chemicals, represents just over 50% of operating revenues. This segment has grown 11% year-to-date and most closely rides on overall consumer demand.

Intermodal, has been the fastest-growing segment for Norfolk in recent years and continues to represent a tremendous future opportunity. It currently represents nearly 21% of total operating revenues, an increase of 19% from a year ago.

Intermodal freight transportation is the movement of freight in specialized containers that can use multiple modes of transportation (ship, rail, truck) without any handling of the freight itself. This process allows freight to come into a port via ship, get transferred to a rail car and then subsequently moved onto a truck closer to its final destination, all without any cargo handling. This reduces costs, improves security and cuts down on damages and losses.

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