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Norfolk Southern Corp. Takes a Dip

Since reaching a high of 9,217.44 on December 29, 2014, the Dow Jones Transportation Average (^DJT) has declined 5.3% year to date.

It’s underperformed the broader stock market – resulting in the index’s first quarterly loss in almost two years.

The index sits just below its 200-day moving average. So investors should read the writing on the wall: A sustained downtrend is certainly possible.

If you’ve been ignoring the warning signs, now’s the time to wake up…

One company in particular is feeling the pressure.

Norfolk Southern Corporation (NSC) shares declined by more than 4.3% on Tuesday. The decline was on the heels of the resource transportation company’s forecast for significantly weaker first-quarter earnings.

The company will release the final results on April 29. But it’s expecting earnings per share (EPS) of just $1 on revenue of $2.6 billion. That’s a 21.8% drop against analyst expectations of $1.28 EPS on $2.7 billion in revenue.

Facing Coal Challenges Head On

While the company indicated that decreases in fuel surcharges affected each of its three operating segments, the chief blame for the sluggish earnings outlook is the continuing struggle with falling coal shipments.

Norfolk reports that coal shipments declined 6% in 2014 – after falling 5% in 2013 and 13% in 2012.

And with worldwide demand for coal expected to continue falling, Norfolk Southern will likely see no significant improvement in coal delivery through the end of 2016.

This means that NSC will see continued weakness in earnings going forward since coal represents about 20% of Norfolk Southern’s operating revenue.

It’s not all doom and gloom, though. Sure, the headwinds facing NSC seem significant for investors.

But the good news is that the company has done a good job of expanding its non-coal business segments, which were reflected in the company’s overall performance in 2014.

So, despite the weakness in coal shipments, the company grew its total revenue by 3% to $11.6 billion in 2014.

And Norfolk saw its total traffic increase by 5% on the year, led by an 8% increase in intermodal volume.

More importantly, the company successfully took steps to control its costs of doing business, which was reflected in the company’s best-ever operating ratio of 69.2% last year.

Don’t Make a Move

At the end of the day, the transportation index is a leading economic indicator, and it’s telling investors that slower growth may be just over the horizon.

It’s likely the economy grew at a 1.5% annualized rate in the first quarter, which is a decrease of 2.2% compared to the final three months of 2014.

These facts – in combination with NSC’s lowered earnings guidance – show that the company is fully valued at about $98.51 per share. Therefore, Tuesday’s decline brought the stock roughly in line with its value based on normalized earnings.

Should the economy pick up legitimate speed in the ensuing months, the prospects for a higher stock price increase. But until then, Norfolk Southern shares remain a “Hold.”

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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