In fiscal 2015, Norfolk Southern (NSC) restructured its underperforming subsidiary, Triple Crown Services. The aim of this restructuring was to focus on hauling vehicles and auto parts, given booming automotive sales. In this part, we’ll look at the market conditions challenging NSC’s intermodal business.
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The strength of US dollar is concerning. While the strong US dollar is hampering US exporters, imports have also declined. Inventory stockpiles with shippers have been a hindrance to imports. According to Norfolk Southern’s investor presentation in September 2016, year-over-year TEU1 (twenty-foot equivalent unit) volume growth fell in the first seven months of 2016. This fall corroborates the reduction in imports and is certainly not good for the intermodal growth. On the other hand, the retail inventory-to-sales (WMT) ratio has been increasing. The higher the retail inventory-to-sales ratio, the lower the prospects of intermodal growth. If this ratio continues to increase, the intermodal business’s growth may be impacted in the next few quarters.
Another factor impacting intermodal growth is truck capacity. In its September 2016 presentation, NSC stated that it expects truck capacity (JBHT) to tighten in the long term. However, the fact remains that the present market has excess truck capacity. Truckstop.com’s MDI (Market Demand Index) measures available loads versus available trucks. When available trucks exceed available loads, it denotes excess capacity. In 3Q16, the MDI indicated that there was excess truck capacity.
Excluding Triple Crown operations, Norfolk Southern’s intermodal business, in volume terms, is outpacing truckload companies in the long-haul truck markets. Long-haul markets comprise routes between 300 and 550 miles. However, the sustainability of this outpacing is doubtful considering the low fuel prices. Trucking (SWFT) still has a competitive edge, especially in time-sensitive deliveries.
Investors interested in the transportation sector could consider the Industrial Select Sector SPDR ETF (IYJ). Major US railroads make up 6% of IYJ. In the next part, we’ll look at analysts’ estimates for Norfolk Southern’s operating margins in 3Q16 and onward.