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Norfolk Chalks Out Investment Plan

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Norfolk Southern Corporation (NSC - Free Report) one of the leading railroads in North America has announced an investment plan of $2 billion for 2013. The investment plan will focus mostly on building infrastructure, equipment and technology that will drive safety and quality service for the rail. Over the long term, we believe these investments will support the company’s growth goal by enhancing productivity measures and network fluidity.  

The largest share of this investment will be directed toward track improvements, which will cost around $831 million. Locomotives spending would be around $420 million and investment in Positive Train Control (PTC) is estimated around $229 million. In addition, technology investments, involving upgrading systems and computers to enhance safety measures and operational efficiency, would be around $57 million.

Further, investments in Intermodal terminals of approximately $203 million will involve a multi-year expansion project of Bellevue rail yard in Northern Ohio terminal constructions at Charlotte, N.C., a new facility construction for locomotives in Conway, Pa. and construction of bulk transfer facilities.

The company is building numerous intermodal terminals including Heartland Corridor (to reduce transit time from East coast port to Midways), Crescent Corridor (from Boston to Austin), Patriot Corridor (to improve service in New England), Meridian Speedway (shortest, fastest reefer trailer service from West Coast to Atlanta), and MidAmerica Corridor (long-term potential for the Chicago-Florida route) in order to expand its existing network. Among these, the Crescent Corridor, designed to compete with the high density-trucking lane along Interstate-81 will likely be completed by 2013.

Looking ahead, the opening of these new terminals is expected to bring new additional business for the company. The completion of the Panama Canal and expansion of intermodal facility at Rutherford by 2014, along with the ongoing project at the West Coast ports will help to gain market share of international container traffic from the West to the East.  We believe these long-term infrastructural developments will have positive impacts on the company’s growth prospects and ultimately draw revenue synergies.   

However, the main drawback that these investments carry is their near-term implications over the company’s financials. Given the capital-intensive nature and industry-specific requirements of the rail industry, railroads have to resort to heavy capital expenditure for maintenance as well as expansion of their businesses. These capital expenditures draw out significant cash flows impairing near-term profitability of the company, which we believe is a significant headwind given the current economic condition.

Besides Norfolk, other companies’ that have disclosed their capital investment plans include Union Pacific Corporation (UNP - Free Report) and CSX Corporation (CSX - Free Report) . In 2013, Union Pacific plans investment of approximately $3.6 billion, down from $3.7 billion in 2012 and CSX Corporation would spent approximately $2.3 billion, up from $2.2 invested in 2012.

Other Stocks

Another stock worth considering within the sector is Genesee & Wyoming Inc. (GWR - Free Report) that holds a Zacks Rank #1 (Strong Buy rating).

Currently, Norfolk Southern has a Zacks Rank #3 (Hold) .

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