VALUATION HIGHLIGHTS

1. Merchandise Freight constitutes 62% of the Trefis price estimate for Norfolk Southern's stock.
2. Intermodal Freight constitutes 24% of the Trefis price estimate for Norfolk Southern's stock.
3. Coal Freight constitutes 13% of the Trefis price estimate for Norfolk Southern's stock.

WHAT HAS CHANGED?

1. NSC Stock vs. S&P 500 Performance

In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that NSC underperformed the S&P in 2023 and 2024.

2. Q4 2024 Performance
   • Norfolk Southern reported revenues of $3.1 billion in Q3 2024, reflecting a 3% y-o-y rise, primarily due to a 3% rise in Merchandise revenues and a 4% rise in Intermodal. Coal freight was down 2% y-o-y. The company reported EPS of $3.25 during the quarter, reflecting a 23% y-o-y rise.

3. East Palestine, Ohio Derailment
   • A Norfolk Southern cargo train derailed in East Palestine, Ohio, on Feb 3, 2023. Fifty railcars were derailed, and 11 of those contained hazardous materials. (Source - The Washington Post )

     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.

4. 2025 Headwinds
   • The demand for railroad business can primarily be linked to economic growth. The current high inflationary environment, high-interest rates, and recession fears have weighed on railroad stocks in recent quarters.

5. Coal Shipments
   • With the increased use of cleaner energy sources such as natural gas, the demand for coal has dropped significantly over recent years. Consequently, coal shipments have declined from 1.1 million total carloads in 2011 to 0.7 million in 2024.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers of Norfolk Southern's value that present opportunities for upside or downside to the current Trefis price estimate:

• Norfolk Southern's EBITDA margin: We currently forecast Norfolk Southern's EBITDA margin to rise to around the 52% mark over the Trefis forecast period. The company should be able to maintain high margins, driven by the company's productivity improvement initiatives.
  There could be a downside of over 10% to the Trefis price estimate if the margin declines to under 47% by the end of our forecast period.

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.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

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:

Tightening trucking capacity

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.

KEY TRENDS

Volatile coal market

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.