Wednesday, April 22, 2009

Norfolk Southern first-quarter results spur market churn

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Norfolk Southern Corp. Tuesday said its first-quarter net income was $177 million, or 47 cents per diluted share, compared with $291 million, or 76 cents per diluted share, for the first quarter of 2008. Operating revenue fell 22%, to $1.9 billion compared with the first-quarter of 2008, mostly due to a 20% decline in traffic, as well as lower fuel-related revenue.

Wall Street analysts had expected a profit of 54 cents per share, and traders punished NS shares in Tuesday after-market activity, as well as during regular session trading early Wednesday. By day's end, however, shares of the Class I railroad, at one point down almost 10% less than 24 hours earlier, closed almost unchanged, down just 5 cents.

Railway operating expenses for the quarter were $1.6 billion, down 19% from the comparable period a year ago. NS’s operating ratio rose to 80.3%, up from 76.9% in the first quarter of 2008.

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“Current economic conditions were clearly reflected in Norfolk Southern's first-quarter results," said Norfolk Southern CEO Wick Moorman in a statement. "We are responding by aggressively controlling costs, while enhancing our service and continuing to invest in projects that will drive future growth. This approach will position us to participate in the economy's eventual recovery as we tightly manage the company in the face of an ongoing reduction in railway traffic volumes."

Shares of NS fell roughly $1, or about 2.7%, in morning trading Wednesday on the New York Stock Exchange, recovering from a steep plunge during after-market trading Tuesday evening, and by afternoon trading NS shares were up more than 3%.

Dahlman Rose & Co. analysts Wednesday noted, "Many investors were expecting strong numbers out of the company given the better-than-anticipated results" announced earlier by both CSX and Canadian National.

In a conference call with analysts Tuesday, Moorman said Norfolk Southern foresees "significant pressure" on second-quarter performance, but also expects declines to approach the bottom during the period, with modest improvement possible in 2009's second half. 

On Thursday, Dahlman Rose had a few more-optimistic things to say:

"Pricing remains VERY strong: Average revenue per carload (ARC) was down 2% in 1Q as an 8%+ gain in pure pricing somewhat offset a significant drop in fuel surcharge revenues ($94 million versus $320 million in 1Q:08) and a $40 million negative mix impact.  These results were particularly impressive given the pressure that is being placed on eastern domestic intermodal business by the trucking sector. Pricing Remains VERY Strong. Average revenue per carload (ARC) was down 2% in 1Q as an 8%+ gain in pure pricing somewhat offset a significant drop in fuel surcharge revenues ($94 million versus $320 million in 1Q:08) and a $40 million negative mix impact.  These results were particularly impressive given the pressure that is being placed on eastern domestic intermodal business by the trucking sector.

"Taking cautious steps and controlling costs: NS continues to store locomotives with fewer than 150 being stored as of January 2009 and now approaching 400 in April. The number of railway employees has also declined with a 4.2% drop since November 2008. During the first quarter of 2009, NS did not repurchase any shares of common stock and management stated they will not do so until the economy improves. The company ended the quarter with $884 million in cash and cash equivalents.

"Modestly trimming estimates: We are trimming our 2009 and 2010 EPS estimate by $0.05 to $3.10 and $3.70, respectively. Accordingly, our price target drops $1 to $46 per share.  We are maintaining our Buy rating as NS is poised to benefit once volumes eventually return to the North American rail network. However, we are not without caution as we believe coal volumes have the potential to come under notable pressure after the first quarter due to continued mine outages, lower thermal demand, and a considerable drop off in export coal to Europe."