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One of the leading North American railroads – Norfolk Southern Corp. (NSC - Analyst Report) 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 8th 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 - Analyst Report).

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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