Wednesday, April 23, 2014

For Norfolk Southern, a difficult first quarter

Written by  William C. Vantuono, Editor-in-Chief
Norfolk Southern CEO Wick Moorman Norfolk Southern CEO Wick Moorman
Coal volume and revenue that dropped 15% and 13%, respectively, in 2014’s first quarter were largely responsible for Norfolk Southern reporting lower net income and operating revenues and a slightly higher operating ratio, compared to the prior-year period.

NS reported first-quarter net income of $368 million, or $1.17 per diluted share, compared with $450 million, or $1.41 per diluted share, earned in the same period of 2013, an 18.2% drop. (First-quarter 2013 net income included a $60 million, or $0.19 per diluted share, gain from a land sale.)

Railway operating revenues were $2.7 billion, 2% lower compared with first-quarter 2013, and shipment volumes decreased 1%. Income from railway operations was $667 million, 3% lower compared with first-quarter 2013. Railway operating expenses were $2 billion, 1% lower than in the same period of 2013. The quarterly railway operating ratio was 75.2% vs. 74.8% in the same period of 2013.

First-quarter coal revenues were $541 million, 15% lower compared with the same quarter of 2013, the result of a 13% volume decrease due primarily to lower utility and export shipments. General merchandise revenues were $1.6 billion, 1% higher than the same period last year, despite overall volume declining 1%. Increased crude and liquefied petroleum gas shipments were offset by declines in automotive (–7%), metals/construction (–1%), and paper/forest shipments (–3%). Agricultural products were flat. Intermodal revenues improved 4%, to $596 million. Growth primarily in domestic business pushed traffic volume up 3% in the quarter compared with the same period of 2013.

Norfolk Southern CEO Wick Moorman remains cautiously optimistic that business will improve. “Following the extreme winter weather across the U.S. rail network which impacted first-quarter results, we are seeing a rebound in shipments across all of our business,” he said. “Our people responded admirably to meet the challenges of the harsh conditions, and we remain focused on delivering superior service to our customers.”

Cowan and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl agrees with Moorman’s assessment. “Norfolk Southern is well-positioned to benefit from the positive macro trends and tightening truckload market,” he said. “This and the compelling valuation lead us to believe that the post-earnings dip is a buying opportunity.

“The company’s intermodal segment, which makes up roughly half of its traffic, saw 4.0% revenue growth, which occurred via a 3.4% traffic increase and a 0.6% RPU (revenue per unit) improvement. While the intermodal revenue growth could not offset the coal revenue decline in first-quarter 2014, we believe this will change in coming quarters. Not only should intermodal volume growth accelerate due to the rollout of new lanes by the company and the shift of freight from a capacity-constrained truckload market, but intermodal pricing should begin to see improvements given the recent spike in truckload rates. Indeed, up until this point, NS had not seen the full benefit of the truckload rate recovery because only 15% of its intermodal business is transactional. We note that yield may be negatively impacted by mix changes, including intermodal growth and a higher percentage of shorter-haul corn traffic. On the coal front, while export weakness does not seem to be going away anytime soon, the utility coal outlook has improved owing to weather-driven stockpile reductions and the expectation of continued strength in natural gas prices.”