Overall, the performance of NSC stock with respect to the index has been lackluster. Returns for the stock were 25% in 2021, -17% in 2022, and -4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that NSC underperformed the S&P in 2021 and 2023.
Norfolk Southern is committed to addressing the issues in East Palestine. Per its website, it has completed hundreds of in-home air tests, removed over 176,000 tons of contaminated soil, and removed thousands of gallons of contaminants and contaminated liquids from the site.
While the exports aided the overall coal shipments for railroad companies in 2018, the trend reversed in 2019 with the trade tensions. With oil and natural gas prices plummeting in 2020 and the Covid-19 pandemic resulting in lower power consumption, coal demand remained weak.
However, this trend has now reversed, with oil prices surging over 40% now from levels seen in 2021 and natural gas prices rising over 65% over the same period. This has resulted in higher demand for coal, a trend expected to continue in the near term.
Consequently, there is a void in demand for these vehicles, which is visible in the decline in their sales. With the coronavirus pandemic in 2020, several automobile plants were shut for a short period or were operating at a lower capacity, again impacting the overall output.
Furthermore, 2021-22 saw an adverse impact on automotive production globally due to the semiconductor chip shortage. There has been a rebound in light vehicle production, with the 2023 figure rising 10% y-o-y. Since the railroad sector is closely correlated to the automobile industry, companies such as NSC see an impact on automotive shipments.
Below are the key drivers of Norfolk Southern's value that present opportunities for upside or downside to the current Trefis price estimate:
For additional details, select a driver above or select a division from the interactive Trefis split for Norfolk Southern at the top of the page.
Norfolk Southern Corporation is one of the largest railroad companies in the Eastern United States, primarily in the rail transportation of raw materials, intermediate products, and finished goods. Goods are transported mainly in the Southeast, East, and Midwest US via interchange services with rail carriers to and from the rest of the United States. Norfolk Southern also transports overseas freight through several Atlantic and Gulf Coast ports.
Its principal subsidiary, Norfolk Southern Railway Company is wholly owned. NSC also has joint ownership, along with CSX, of the Consolidated Rail Corporation. Norfolk Southern's route map covers most of the eastern United States, east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, covering nearly 22 states. Norfolk Southern's primary competitor is CSX Corporation, which covers much of the same territory.
The company operates on 19,100 miles of track, of which 14,312 is owned outright, and the remainder is under trackage rights or leases. Norfolk Southern offers the most extensive intermodal network in the eastern half of the United States.
Norfolk Southern's business mix includes coal, intermodal, and general merchandise, which is composed of six major commodity groupings: automotive; chemicals; metals and construction; agriculture; consumer products, and government; as well as paper, clay, and forest products. Although the company's primary role is transporting freight, its non-carrier subsidiaries engage principally in the acquisition, leasing, and management of coal, oil, gas, and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment.
Norfolk Southern's earnings depend upon the volume of freight contracts it sells and its prices. Its expenses primarily consist of labor, fuel, utility, and track maintenance. The largest of Norfolk Southern's customers include steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies, and chemical manufacturers.
We believe the Merchandise freight division is the most valuable division, accounting for roughly 60% of Norfolk Southern's total value. The key factors responsible for this are:
Declining fleet sizes and inadequate availability of truck drivers have significantly tempered the freight transport capacity of the trucking industry. The Hours-of-Service safety regulation for commercial vehicle drivers has put pressure on trucking capacity by limiting the number of working hours for truck drivers. The tight trucking capacity will lead to high volumes of freight shifting to railroads. As the demand for railroads' services increases, so will their pricing power. This allows Norfolk Southern to corner a larger share of U.S. intermodal shipments.
Norfolk Southern's coal shipments have declined over the recent years. This can be attributed to trends in natural gas prices, lower exports, trade tensions, and a decline in coal production. However, now that gas prices soared with 2x growth in 2021, the dependency on coal as an energy source has increased for now, which will aid the Coal freight (export) revenues for railroad companies in the near term.
