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How Norfolk Southern Is Running ahead of the 1Q17 Results

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How Norfolk Southern Is Running ahead of the 1Q17 Results PART 1 OF 5

Why a Norfolk Southern 1Q17 Earnings Preview Matters

Analysts’ 1Q17 revenue estimates

Wall Street analysts are expecting Norfolk Southern (NSC) to report revenue of $2.5 billion in 1Q17. The company’s 1Q16 revenue came in at $2.4 billion, which would mean an estimated rise of 4.9% on a YoY (year-over-year) basis if NSC beats the estimate for its latest quarter.

For fiscal 2017, analysts are anticipating revenue of $10.4 billion for NSC, which would represent a YoY rise of 5.2%. We should note that Norfolk Southern was not able to beat the analysts’ revenue estimates for the past four quarters.

Why a Norfolk Southern 1Q17 Earnings Preview Matters

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Are analysts’ upward revenue projections justified?

Since Donald Trump took over as US President, railroads have expressed a sigh of relief, given the former reality TV show host’s views on climate and the environment—and his promise to put coal-fired power plants back into action. The US EIA (Energy Information Administration) expects for coal’s share in US electricity generation to rise from 30% in 2016 to 31% in both 2017 and 2018.

The same agency foresees the share of natural gas to decline from an average of 34% in 2016 to 32% in both 2017 and 2018. This might be driven by higher expected natural gas prices.

Intermodal, ELD, and fuel surcharges

The inventory-to-sales ratio has come down to 135 in February 2017 from the levels around 150 we saw previously. Investors should note that the lower the ratio, the higher the transportation activity. This should go well for intermodal growth, which fueled by highway-to-rail conversions, in coming quarters.

Meanwhile, with the ELD (electronic logging device) mandate coming into force soon, the trucking industry will likely witness more service disruptions, and this change should benefit the intermodal businesses of railroads like NSC.

Norfolk Southern should see improvements in the fuel surcharges in the first quarter of 2017, mainly due to the higher fuel prices as compared to levels in 1Q16. However, the fuel rise should also benefit rival peer companies like CSX (CSX), Union Pacific (UNP), and Kansas City Southern (KSU).

ETFs

Investors interested in indirect exposure to the transportation sector can opt for ETFs like the Industrial Select Sector SPDR Fund (XLI). Major US railroads and airlines make up 9.1% and 12%, respectively, of the portfolio holdings of XLI.

In the next part, we’ll review the analysts’ take on Norfolk Southern’s operating margins over next four quarters.

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