Overview

We added long NSC to our firms Best Ideas list for many of the same reasons that CP wanted to acquire it. Principally, NSC has underperformed relative to the potential of its assets.  Either Squires and company will fix it – and we do not doubt their ability to do so – or they can expect activism on their doorstep.  Certain headwinds, like the impact of net fuel and the rightsizing of costs, should simply fade with the benefit of time. We continue to see upside potential for NSC share into the triple digits, all else equal.

As an ‘early cycle’ group that is already down, we would expect rails to be a reasonably defensive cyclical long (outperform relative) should there be a recession later this year.  The bear story for rails typically involves pricing pressure amid lower bulk commodity prices.  Fortunately, the disconfirming evidence on pricing should be overwhelming at this point, with tight-lipped NSC noting on the call that “pricing is above the levels that we were seeing at this time last year.”   

We will let other summarize the quarter, but provide updates on some key charts from our early September Black Book below.  For the full suite of charts on NSC, please ping us for our Rail/NSC EQM dataset and Black Book.

Highlights

Net Fuel Impact Sequentially Much Better At ~+1, Hard To Forecast

NSC | Long Thesis Working, Net Fuel Better - NSC 4 4 22 16

Coal Has Been In Secular Decline, But Decline Rate Should Improve From Here

NSC | Long Thesis Working, Net Fuel Better - NSC 2 4 22 16

Network Looking Better, Costs Follow On Lag

NSC | Long Thesis Working, Net Fuel Better - NSC 3 4 22 16