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NSC AT A GLANCE

P/E ► 11.7 AVG EV/EBITDA ► 7.22 AVG ROA ► 7% AVG ROE ► 14.1% AVG Debt to Equity ► 1.70 AVG Current Ratio ► 1.11 AVG Interest Coverage Ratio ► 5.89 AVG

 

 

 

 

 

 

Norfolk Southern (NYSE:NSC) is a U.S. railroad shipping company. The most important commodity transported by NSC is coal, which accounted for 26% of total revenue in 2007. The largest commodities after coal are intermodal containers, agricultural products such as corn, cars, and consumer products.^[1] Its principal subsidiary is wholly-owned Norfolk Southern Railway Company, and it also has joint ownership (along with CSX (CSX)) of Consolidated Rail Corporation. Altogether, it has a network of 21,000 miles of track throughout 22 U.S. states, the District of Columbia and Ontario, Canada.^[2] NSC earned operating revenue of $9.4 billion and net income of $1.3 billion in FY 2007.

Rising oil prices have increased NSC's operating expenses, with the company spending 63% more on fuel in the first quarter of 2008 than it did in the first quarter of 2007.^[3] Also, Archer-Daniels-Midland Company (ADM) filed a lawsuit in March 2008 against NSC and four other railroad companies alleging that they'd collaborated to fix the fuel surcharges they charge customers. On the positive side, NSC benefits from the increased demand for exports of U.S. coal, as shown by the 25% increase in the volume of coal it transported in 2007.^[4]

Business Overview

2005-2007 operating revenue and net income^[5]

2007 revenue by commodity transported^[6]

As the table and chart show, NSC's business grew strongly in 2006; revenue increased 10% and net income increased 16%. However, that growth did not continue into 2007; the figures remained relatively flat, with net income declining 1% year-over-year.

The commodity that contributed the most to NSC's 2007 revenue was coal at 26%. Other commodities shipped by NSC include:^[8]

• Intermodal Containers (20%)
• Metals (12%)
• Chemicals (12%)
• Agricultural Products (11%)
• Cars and Automotive Parts (10%)
• Paper, Clay, and Forest products (9%)

Trends and Forces

NSC System Map 2007^[9]

NSC's coal shipments up 25% in 2007 due to growing demand for U.S. coal exports

The U.S. coal export industry has grown rapidly since 2006; 60 million tons of coal were exported from the U.S. in 2007, compared to just 50 million tons in 2006.^[10] The consulting firm Hill & Associates projects that the volume of 2008 exports will reach between 84 and 88 million tons.^[11] NSC benefits from this trend because the shipment of coal generated 26% of the its 2007 total revenue, more than any other commodity. NSC reported that the volume of coal it transported in 2007 increased 25% over the previous year.^[12]

Rising oil prices increased NSC's Q1 2008 fuel costs by 63%

The increase in oil prices from an average of $72 per barrel in 2007 to a record high of $145 per barrel in July 2008^[13] has raised NSC's shipping costs. In 2007, NSC's fuel costs came to $1.17 billion (12% of total operating expenses).^[14] Even more, fuel costs were $156 million higher in the first quarter of 2008 than in the same quarter in 2007, a 63% increase.^[15] The main way that NSC offsets rising fuel costs is by passing them on to customers through fuel surcharges. High fuel surcharges, however, make rail shipping more expensive for customers, who supply all of NSC's business.

NSC named as a defendant in fuel surcharge-fixing lawsuit

In March 2008, Archer-Daniels-Midland Company (ADM) filed an antitrust lawsuit against five U.S. railroad companies, including NSC. The suit alleges that Burlington Northern Santa Fe (BNI), CSX (CSX), Kansas City Southern (KSU), Union Pacific (UNP) and NSC cooperated in fixing their prices for fuel surcharges.^[16] Fuel costs are a large part of NSC's operating expenses, making up 12% of total expenses in 2007.^[17] As such, fuel surcharges are an important way of NSC to pass on some of these higher costs to its customers. As of July 2008, there was no news on the progress of the suit.

Competition

NSC's chief competitor is CSX (CSX), the other main freight railroad in the Eastern U.S. NSC and CSX cover most of the same territory.^[18]

Market Share

The Association of American Railroad reported that the total 2006 freight revenue in the U.S. rail industry was $54 billion (as of 7/28/08, 2007 figures were not yet available).^[21] The following market share figures are based on this number.

References

1. ↑ NSC 2007 10-K, page K23
2. ↑ NSC 2007 10-K, pages K3-K4
3. ↑ SeekingAlpha.com - NSC Q1 2008 Earnings Call 4/23/08
4. ↑ W. Va Could Benefit From Booming Coal Exports - Charleston Daily Mail, 1/30/08
5. ↑ NSC 2007 Annual Report, page K20
6. ↑ NSC 2007 10-K, page K23
7. ↑ NSC 2007 10-K, page K20
8. ↑ NSC 2007 10-K, page K23
9. ↑ NSC 2007 Annual Report, inside cover
10. ↑ Energy Information Administration - U.S. Coal Exports
11. ↑ Current U.S. Coal Boom Likely to Last: Experts - Reuters, 6/26/08
12. ↑ W. Va Could Benefit From Booming Coal Exports - Charleston Daily Mail, 1/30/08
13. ↑ Short-Term Energy Outlook - EIA, 7/8/08
14. ↑ NSC 2007 10-K, pages K44
15. ↑ SeekingAlpha.com - NSC Q1 2008 Earnings Call 4/23/08
16. ↑ Railroad shipping: Archers, Daniel, Midland Files Lawsuit Against Rail Carriers Over Fuel Surcharges - Logistics Management Magazine, 3/31/2008
17. ↑ NSC 2007 10-K, pages K44
18. ↑ NSC 2007 10-K, page K11
19. ↑ CSX 2007 10-K, pages 24, 29
20. ↑ NSC 2007 10-K, pages K5, K8
21. ↑ Overview of American Railroads - Association of American Railroads, May 2008
22. ↑ Union Pacific 2006 Report R-1, page 16
23. ↑ BNSF 2006 Report R-1, page 16
24. ↑ NSC 2006 Report R-1, page 16
25. ↑ CSX 2006 Report R-1, page 16
26. ↑ Grand Trunk Railroad 2006 Report R-1, page 16
27. ↑ KSU 2006 Report R-1, page 16
28. ↑ Soo Line Railroad Company 2006 Report R-1, page 16