Wednesday, July 26, 2017

NS OR hits record low in 2Q 2017

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Norfolk Southern Chairman, President and CEO James A. Squires Norfolk Southern Chairman, President and CEO James A. Squires

Significant increases in net income and income from railway operations combined with a small increase in operating expenses compared to the prior-year quarter produced an all-time low operating ratio of 66.3% in Norfolk Southern’s 2017 second quarter.

Second-quarter net income was $497 million, up 23% year-over-year, driven by a 15% increase in income from railway operations to $888 million, and the record-low operating ratio. Diluted earnings per share were $1.71, up 26% year-over-year.

Railway operating revenues of $2.6 billion increased 7% compared with second-quarter 2016, as overall volumes were 6% higher, reflecting coal and intermodal growth. Railway operating expenses increased $65 million, or 4%, to $1.7 billion as targeted expense reductions helped offset volume and inflation-related expenses.

“Norfolk Southern’s strong financial results and all-time record operating ratio reflect the power of our team, successful execution of our dynamic plan, and focus on operating even more efficiently while providing high quality service to customers,” said Chairman, President and CEO James A. Squires. “We remain committed to our core pillars of safety, service, stewardship and growth as we continue to enhance operations across the organization. We are confident in our ability to reach our goals and deliver sustainable shareholder value in the near and long terms. As a result of our achievements to date and the confidence we have in our outlook, we are increasing this year’s share repurchase guidance by 25% to $1 billion.”

Commented Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, “We have increased confidence that NS could reach its sub-65% OR before 2020 and are modeling for a 130 bps improvement in 2018 to 66.0%. The company delivered strong 2Q17 results despite flooding and fires, achieving its best ever quarterly locomotive productivity. We are maintaining our 2018 EPS estimate, which is already 5% above consensus, and our $130 price target.

“We remind investors that earlier this year NS’s board put in place an accelerated turnaround incentive plan that would reward management if the turnaround accelerates. On July 18, the carrier announced the planned consolidation of its Central Division headquarters in Knoxville into three surrounding divisions, reducing the number of operating divisions on its system to 9 from 10. We believe further yard and track consolidation and streamlining of the network could occur as the company executes on its operational plan. This, coupled with the ongoing turnaround at competitor CSX and improving rail conditions, could indeed mean NS achieves its stated operational targets ahead of schedule. Although we think this would still be done using what NS. has described as a measured approach.

“On the pricing front, we believe NS should not have a problem achieving increases in excess of rail inflation. Pricing in 2Q17 was in line with the prior quarter, and management does not see a major change in the remainder of the year. That said, we would not be surprised if pricing begins to improve as the freight recovery continues while freight capacity, including in the truckload market, has been somewhat curtailed. According to our proprietary 2Q17 Rail Shipper Survey, respondents expect rail pricing to increase 3.0% on average in the next 6-12 months, That’s up from our prior survey result of 2.6%. We are fine-tuning our 2017 EPS estimate to $6.50, from $6.55, and maintaining our 2018 EPS estimate of $7.40. Our price target of $130 remains unchanged. It is based on the same 17.5x multiple and our 2018 EPS estimate.



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