Thursday, April 27, 2017

Record earnings in quarter for Norfolk Southern despite rising fuel costs

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Record earnings in quarter for Norfolk Southern despite rising fuel costs Railway Age/William Vantuono

Norfolk Southern Corp. saw record earnings in the first quarter with net income of $433 million, up 12% on-year, on railroad income that increased 7%.

The carrier, based in Norfollk, Va., said earnings per share came to $1.48, a gain of 15% and a record for any first quarter.

“Norfolk Southern’s record results for the first quarter demonstrate the efficacy of our strategic plan, under which we are enhancing our service quality and network performance while driving significant efficiency improvements,” said James A. Squires, Norfolk Southern chairman, president and chief executive. “Our focus on providing a superior service product has positioned us for growth and, coupled with our cost discipline, has contributed to a solid start to the year. Our strategy provides a strong foundation for growth at low incremental costs, a powerful formula for enhanced shareholder value.” Railroad operating revenues of $2.6 billion increased 6% compared with first-quarter 2016, as volumes finished 5% higher on growth in coal, intermodal, and general merchandise.

Rail operating expenses increased $105 million, or 6% percent, to $1.8 billion, mostly on rising fuel costs of $64 million.

Income from rail operations also set a record at $773 million, up 7%. The railroad’s operating ratio, or operating expenses as a percentage of revenues, was 70.0% also a record for the first quarter.

“Norfolk Southern’s slow and steady approach looks good thus far,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “NS continues to deliver on its operational improvement initiatives, and now it is getting some cooperation from the market. For this year, we are modeling for a 120 bps OR improvement and raising our already-above-consensus EPS estimate by a nickel. Our confidence remains high that the company can achieve its longer-term target of a sub-65% OR by 2020, if not earlier.

“NS reported another solid quarter, beating our and consensus estimates top to bottom. EPS came in at $1.48, up 15% y/y and above our and Street estimates of $1.37 and $1.36, respectively. The result was aided by a lower-than-expected tax rate, which had a roughly $0.06/share positive impact on the result relative to our estimate. The share count was higher than our estimate, which resulted in a $0.02/share negative impact on the result. The operating income increased 7% y/y to $773 million, also beating our and the Street estimate of $749 million. Revenue grew 6% to $2.57 billion, above our and consensus estimates of $2.55 billion and $2.54 billion, respectively. The OR) was 70.0%, a modest 10 bps y/y improvement and 70 bps better than our assumption.

“NS’s board recently put in place an accelerated turnaround incentive plan that would reward management if the turnaround accelerates. This, coupled with the looming turnaround at competitor CSX and improving rail conditions, could mean NS achieves its stated operational targets ahead of schedule, although we think this would still be done using what NS describes as a measured approach. NS continues to target a sub-65 OR and $650 million in productivity savings annually by 2020. In 2016 it achieved $250 million in productivity savings and is targeting an additional $100 million in 2017. If management can keep posting results close to what we’ve seen in 2016 and 1Q17 we would not be surprised if the OR target happens sooner than 2020. With a 2016 OR of 68.9%, management achieved its sub-70 goal and is on track to achieve another OR improvement this year. We’re modeling for a 120 bps improvement to 67.7% in 2017 and another 110 bps improvement in 2018.

“On the pricing front, we believe NS should not have a problem achieving increases in excess of rail inflation. Pricing could improve progressively throughout the year as freight demand rebounds gradually while freight capacity, including in the truckload market, has been somewhat curtailed. According to our proprietary 1Q17 Rail Shipper Survey, respondents expect rail pricing to increase 2.6% on average in the next 6-12 months.

“We are modestly raising our 2017 EPS estimate from $6.50 (which was already above consensus of $6.21) to $6.55 in order to reflect the 1Q beat and improving conditions. Our 2018 EPS estimate of $7.40 (also above consensus of $6.92) remains intact. Our price target of $130 remains unchanged. It is based on the same 17.5x multiple and our 2017 EPS estimate.”

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