One of the leading North American railroads Norfolk Southern Corp. (NSC) is expected to bolster its sand shipments upon the construction of a transloading facility at HOST terminal in Horseheads, New York. The new construction at HOST claims to drive shipments higher with five times faster unloading facilities, implying upto 100 freight cars within 48 hours. HOST terminal, jointly owned by Carriage House Partners and RLB Holdings, is now undergoing the last leg of construction of a $20 million, 90,000-square-feet facility that will begin operations by the 8 th of this month.
The terminal once completed is expected to emerge as a key distribution centre in the Marcellus Shale region. The new construction along with another recently built 90,000-square-feet facility will serve as a transloading centre for Norfolk Southern. Given the strategic location of HOST in the key industrial region like Marcellus Shale, we expect its infrastructural development to bode well for freight railroads like Norfolk Southern.
Since 2009, the company has been using this terminal for freight transloading and in a couple of years it registered a significant growth in operations. Norfolk Southern began with operations of unloading 104 railcars, which reached approximately 2,600 cars by 2011. Marcellus Shale stretches across the Appalachian Basin through New York, Pennsylvania, Ohio and West Virginia and contains some of the highly rich natural gas reserves.
Given its proximity to key industrial markets in the North Eastern region, higher investments in building rail infrastructure would ultimately translate into higher shipments for railroads, especially in the absence of adequate pipeline infrastructure. The downturn in the coal shipments have diverged rail carriers interest into other freight products. Railroads major focus now happens to be on tapping potential opportunities in petroleum and natural gas markets given their current demand trend.
Not only are the core products like petroleum and natural gas winning more businesses but ancillary products such as frac sand, which is used in drilling activities to extract oil and gas is also emerging as a key freight product for railroads. As a result, most of the railroads infrastructural development and investments are directed toward improving shipments in these product categories. Apart from external developments like HOST, Norfolk Southern has taken up several railroad development projects under its own wings.
The company s major intermodal corridor initiatives (Heartland, Crescent, Meridian, and Titusville) are likely to boost its intermodal capacity and are expected to bode well for shipments in petroleum as well as in other product categories. The company targets completion of approximately 4 to 5 intermodal terminals in 2012, including terminals in Birmingham, Greencastle, Pennsylvania and Mechanicville that come under its Crescent corridor project. The new terminals are expected to provide access to new markets and enhance capacity approximately by 15.0%.
Overall, the company targets to spend around $2.4 billion on these capital projects. About $134.0 million of these investments are expected to be directed toward intermodal infrastructure in the Atlanta region. Investments in new projects this year will revolve around the Birmingham Atlanta network and the north-south line between Chattanooga and Cincinnati.
Further, the company will continue to fund public-private partnerships such as Crescent Corridor and CREATE. Investments in these projects would involve $322.0 million, of which approximately 50% will be directed toward the ongoing projects in the three Crescent Corridor terminals in Tennessee Alabama and Pennsylvania. However, we believe heavy investment in a distressed market condition coupled with a looming global economic outlook could weigh on the company s current operational performance.
Further, the company faces stiff competition from other railroads like CSX Corp. (CSX). We are currently maintaining our long-term Neutral recommendation on the stock. For the short term (1 3 months), the stock retains a Zacks # 3 Rank (Hold rating).
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Norfolk Southern to Haul More Sand – Zacks.com
Despite the gloomy economic outlook and dampened coal demand, Norfolk Southern Corp. s (NSC – Analyst Report) second quarter earnings were driven by strong operating performance and cost-control measures. Quarterly earnings surpassed the Zacks Consensus Estimate and also improved from the year-ago level.
We believe accelerated investments in new projects, coupled with business expansion, will likely result in strong growth. Further, the company remains committed to enhancing shareholders value in the form of dividend payments and share buybacks, and looks to further improve service offerings. However, several headwinds such as the downturn in coal and crop markets will likely limit the potential upside over the near term.
In addition, tightened railroad regulation and competitive pressure from other leading railroads such as Union Pacific Corporation (UNP – Analyst Report) and CSX Corp. (CSX – Analyst Report) also remain significant headwinds for the company s growth. Consequently, we maintain our cautious stance on the company with a long-term Neutral recommendation. We believe Norfolk Southern is poised to benefit from strong pricing momentum on the back of growing market demand and shortage in truckload transportation.
We expect the company s pricing improvements together with productivity gains to offset the current rail inflation. It is also expected to lead to continued margin improvement and earnings growth this year and beyond. We believe the company will gain from its superior service and network capabilities, infrastructural investments, and accelerated growth in Intermodal and Merchandize segments, aided by strong freight pricing.
Norfolk Southern initiated adequate cost-control measures that bode well for growth targets. As a result, Norfolk Southern is replacing its older and less fuel-efficient locomotives with new machinery. We expect the new fuel-efficient locomotives to reduce average fleet age and result in lower maintenance expenses, driving further cost improvement.
Further, lower fuel prices are also expected to enhance margins. We remain highly optimistic on the company s growth across most segments. In particular, the company s Merchandize and Intermodal recorded significant revenue growth that offset lackluster performance of the Coal segment.
Merchandize mainly benefited from automotive, which will continue to bode well on higher North American light vehicle production, along with business wins from Volkswagen and other manufacturers. Steel shipments are also on the rise, with increased demand from Russia and Eastern Europe. New business wins in fracturing sand, mainly from Marcellus and Utica shale regions and products related to natural gas drilling will remain key growth drivers.
Additionally, higher shipments of crude oil and waste products such as ethanol will continue to drive growth for the segment. Further, Intermodal will continue to gain from highway conversions. International intermodal business is also expected to remain strong on capacity additions after completion of key intermodal terminal projects.
However, the near-term growth of Norfolk Southern is expected to be tempered by its aggressive outlook on accelerated crew capacity, increasing locomotive and freight car material expenses, and compensation benefit expenses. Despite its consistent focus on reducing its operating ratio, the company plans to ramp up hiring for business growth. Although this is a significant strategic move for long-term gains, it is likely to remain detrimental to improving margins in the near term.
Moreover, the current market conditions in utility coal remain unfavorable for the company in the near term. Given the low prices of natural gas and declining electricity generation, utility coal revenues will remain headwinds for the company this year. In addition, the U.S.
grain market also looks suppressed due to the drought in the U.S. Mid-West. Going forward, the company also estimates subdued performance to affect its earnings for the third quarter of 2012.
Recently the company provided its third quarter 2012 outlook, with earnings per share projected in the range $1.18 to $1.25. The company expects poor coal shipments and lower fuel surcharge to have an adverse impact on the company s growth. The projections remain significantly below $1.59 per share earned in the third quarter of 2011.
For the short-term (1-3 months) the stock has a Zacks #3 Rank (Hold).
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Risk-Reward Balances Norfolk Southern – Zacks.com
One of the leading third party logistic companies, C.H. Robinson Worldwide, Inc . (CHRW – Analyst Report) recently announced to acquire Polish freight carrier Apreo Logistics S.A. The deal terms remain undisclosed.
Apreo specializes in truckload offerings that involve dry van and temperature controlled freight transportation. In addition, the company has warehouse facilities and deals in ocean and air freight forwarding. C.H.
Robinson is expected to benefit from Apreo s gross annual revenues of more than $100 million and a market base comprising 2000 customers. Apreo is also expected to add infrastructural capabilities with 21 offices across Poland and a work force of 300 employees. C.H.
Robinson did not specify any timeline for closing the acquisition but stated that the deal is subject to regulatory approvals from the Polish Office for Competition and Consumer Protection. Despite the looming economic backdrop and a slow down in the freight demand, C.H. Robinson remains keen on expanding its footprint via acquisitions.
Although the near-term outcomes are too early to project, we foresee long-term synergies arising from these acquisitions. Given the on-going Eurozone crisis and dwindling financials of small European companies, industry big wigs like C.H. Robinson are leveraging the opportunity of penetrating into a potential market of Europe.
Since poor market conditions are weighing on the market value of these companies, the acquisition cost remains comparatively lower. Further, the European freight market remains highly fragmented and mainly constitute small operators that cater to localized regions. This makes them all the more susceptible to acquisition by larger peers.
However, a large carrier like C.H. Robinson with substantial financial and infrastructural facilities would like to seize the opportunity of integrating its operations through various acquisitions in Europe. The strategy can be well demonstrated by the emerging expansion trend in the parcel delivery industry.
Companies like FedEx Corporation (FDX – Analyst Report) and United Parcel Service, Inc. (UPS – Analyst Report), pursued expansions plans through multiple European acquisitions. While, FedEx acquired Opek Sp. z o.o., a Polish courier company and TATEX, a French B2B Express transportation company.
United Parcel Service bought Kiala, a European consumer delivery company and is also on the verge of completing the acquisition of Dutch shipping company TNT Express. However, over the near term, heavy capital expenditures involved in funding acquisitions can lead to financial distress. The company may finance its acquisitions either with available cash, issuing equity or raising debt.
In such an event, the key concern would either be the liquidity position of the company or the margins, which may be weighed down by the rising interest burden due to loans. We are currently maintaining our long-term Neutral recommendation on C.H. Robinson.
For the short term, the company holds a Zacks #3 (Hold) Rank.
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