NS 1Q21: ‘Strong Performance’ Despite Disruptions (Updated, Cowen)

Written by Marybeth Luczak, Executive Editor
“Our first-quarter results demonstrate our team’s ability to deliver strong performance in the face of significant supply chain disruptions,” said NS Chairman, President and CEO James A. Squires.

“Our first-quarter results demonstrate our team’s ability to deliver strong performance in the face of significant supply chain disruptions,” said NS Chairman, President and CEO James A. Squires.

“Our steadfast commitment to improving productivity and executing our Precision Scheduled Railroading strategy has propelled us to another record operating ratio performance, while we grew revenues and earnings in the quarter,” Norfolk Southern (NS) Chairman, President and CEO James A. Squires said April 28 during a 2021 earnings announcement.

The railroad reported net income of $673 million, diluted earnings per share of $2.66, and an operating ratio of 61.5%.

Railway operating revenues for the quarter came in at $2.639 billion, up 1% from the prior-year period’s $2.625 billion, driven primarily by a 3% increase in volume, according to NS. The railroad noted that “volume declines from February weather events were largely offset by stronger January and March [carloadings].”

Railway operating expenses were $1.624 billion, a decrease of 21%, or $433 million, vs. first-quarter 2020, which included a non-cash locomotive rationalization charge “as a result of productivity gains achieved through the successful introduction of PSR,” NS reported. (In 2020, NS sold 703 locomotives “deemed excess and no longer needed for railroad operations,” and recorded a $385 million loss “to adjust their carrying amount to their estimated fair value, which resulted in a $97 million tax benefit,” the railroad noted.) Excluding that charge, NS said, operating expenses were down 3%, or $48 million, compared with adjusted operating expenses in the first quarter of 2020, “driven by lower fuel, compensation and benefits, and materials expenses.”

Income from railway operations was $1.015 billion, an increase of 79%, or $447 million, year-over-year—a first-quarter record, NS said. Excluding the effect of the locomotive rationalization charge in first-quarter 2020, income from railway operations was up 7%, or $62 million year-over-year, according to the railroad.

The first-quarter 2021 operating ratio came in at 61.5%. vs. first-quarter 2020’s adjusted operating ratio of 63.7%, which excludes the locomotive rationalization charge.

2021 Outlook

Looking ahead, NS said it expects an approximately 9% year-over-year growth in revenue, with intermodal and merchandise as the leading drivers, and coal continuing a “secular decline.” Additionally, the railroad anticipates a “greater than 300 basis points improvement” for the operating ratio in 2021, vs. the 2020 adjusted operating ratio of 64.4%. Capex is anticipated to reach approximately $1.6 billion.

NS Chairman, President and CEO James A. Squires

“Our first-quarter results demonstrate our team’s ability to deliver strong performance in the face of significant supply chain disruptions,” Squires said. “The reopening of the economy provides meaningful tailwinds for continued strength in both the consumer and manufacturing sectors, and our long history of delivering sustainable transportation solutions for customers will continue to drive long-term value for our shareholders, customers, and the communities we serve.”

The NS Investor Relations page provides more details.

Cowen Insight: ‘NS on a Roll’

Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl

“NSC [NS] posted a clean beat with an impressive OR improvement that exceeded our expectations, despite severe weather that affected its network,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “The second quarter appears to be off to a strong start, and the 2021 outlook paints an impressive growth picture for the rest of the year. We increase our price target to $297 from $270, and reiterate Outperform.”

Cowen’s Key Takeaways:

• “NSC reported first-quarter EPS of $2.66, coming in ahead of the consensus figure of $2.55 and our estimate of $2.58. OR of 61.5% beat our estimate of 62.6% in the first quarter; NSC was able to reduce operating expenses by 3% year-over-year despite incurring incremental costs due to severe weather in February that we’ve seen across the industry.

• “Operating income in the quarter was $1,015MM, coming in ahead of the consensus $975MM. Total volume grew approximately 3% in the quarter, led by intermodal and automotive, at +6.4% and +3.7%, respectively. Strong growth in intermodal was driven by a continuation of inventory replenishment and a tight truck market. Retail sales growth and in e-commerce demand has been a catalyst for this segment as well. We expect intermodal volumes to continue to outperform and have seen this in our quarter-to-date carload data. Consumer spending is expected to rise, and low inventory levels with the tight market should persist. While quarter-to-date automotive volume has been strong, the current semiconductor shortage has caused some uncertainty as we look forward. While coal saw volume growth in the first quarter, the 2021 outlook is soft as alternative energy sources are likely to negatively impact this segment on a full year basis.

• “NSC new guidance calls for approximately 9% revenue growth in 2021 (which is slightly below consensus when compared with the 2020 and 2021 revenue forecast), and greater than 300 bps of OR improvement, ending 2021 on a 60% run rate.

• “NSC remains committed to its buyback program, purchasing 2.3MM shares in the quarter at an average price of $254, and stated they will continue to use excess cash to repurchase stock. Dividends will be 35%-40% of net income.

• “We are adjusting our 2021 and 2022 EPS estimate to $11.50 from $11.20 and $13.50 from $13.15, respectively. Using a 22x multiple (up a turn to reflect strong execution) and our new 2022 EPS estimate, our price target goes to $297 from $270, and we reiterate Outperform.”

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