Lower rail volumes create buying opportunity in NSC

Norfolk Southern (NSC) fell along side the rest of the railroad industry as the U.S. Rail Carload Traffic Report for the week ended June 20 showed that freight traffic remained weak, down 17.7% from a year ago.

The last few weeks had showed some modest improvement, but today’s report indicates the gains were short-lived and are likely to remain at this level until there is more visible evidence of an economic recovery.

Intermodal volume, which is not included in carload data, was down 17.8% from a year ago, with container volume falling 12% and trailer volume declining 39%.

18 of 19 commodity groups tracked by the Association of American Railroads (AAR) were lower except for the “all other carloads” category, which was up 11.9% year-over-year. Lumber and wood products were down by 37.6% and motor vehicles and equipment were down by 51.6%.

Volumes and pricing in the railroad industry are not barometers of the general economy like other transportation companies like FedEx (FDX) or United Parcel Service (UPS) since railroads returns cost of capital and companies pay for their own infrastructure improvements.

Like all railroads, volumes have been in decline in recent quarters due to depressed economic activity. This has created an attractive buying opportunity in Norfolk Southern, whose strong pricing power helps the company generate about $1 billion in free cash flow per year – over 10% of revenue. As the economy recovers, strong pricing power and increasing volumes should enhance Norfolk’s earnings power and produce attractive shareholder returns.

For more on NSC, see my March 17 post.

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Peter J. Lazaroff