NS 2Q19: Volume Down, But Still Sets Records

Norfolk Southern’s second-quarter 2019 financials were not much different than those of most of its Class I peers: Record operating income, operating ratio, net income and earnings per share, despite a substantial volume decrease.

NS’s 2Q19 net income was $722 million, up 2% year-over-year from $710 million, a result of a 4% increase in income from railway operations to $1.07 billion from $1.03 billion. This yielded a record second-quarter operating ratio of 63.6%, a 100 basis-point improvement from 2Q18’s 64.6%. Diluted earnings per share were $2.70, up 8% year-over-year compared to 2Q18’s $2.50, also a second-quarter record. Railway operating revenues of $2.93 billion increased 1% compared with the prior year’s $2.90 billion, as a 5% increase in average revenue per unit was offset by a 4% decline in total volume. Railway operating expenses were $1.86 billion, an 0.1% decrease (an almost negligible $12 million), compared with $1.87 billion last year, as fuel price declines and lower purchased services and rents were offset by increased depreciation expense.

For the first six months of 2019, compared to the prior-year period, NS’s net income grew 11%, from $1.26 billion to $1.4 billion. Income from railway operations grew 9%, from $1.86 billion to $2.03 billion. Railway operating revenues grew 3%, from $5.62 billion to $5.77 billion. The operating ratio improved 210 basis points, from 66.9% to 64.8%. Diluted EPS was $5.21, an 11% improvement over 1H18’s $4.43.

“Our strong financial and operational performance in the second quarter was achieved while also finalizing preparations for the successful implementation of our new operating plan, TOP21,” said NS Chairman, President and CEO Jim Squires.

“NS reported a slight top-to-bottom miss to our and Street estimates,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “However, operating metrics improved materially and should continue to do so on the heels of the network-wide deployment of TOP21 on July 1. The company maintained its near and longer term operating goals. We’re fine tuning our 2019 EPS estimate while our 2020 estimate and $228 PT remain intact.

“NS reported 2Q19 EPS of $2.70, below our and consensus estimates of $2.78 and $2.79, respectively. Operating income grew 4% to $1.065 billion, also below our and Street forecasts of $1.105 billion and $1.115 billion, respectively. Revenue grew 1% to $2.925 billion, compared to our and consensus estimates of $2.961 billion and $2.949 billion, respectively. The operating ratio improved ~100 bps y/y to 63.6% but was 90 bps worse than our expectation and 140 bps worse than consensus. The modest 1% revenue growth occurred as a 4% volume decrease was more than offset by a 5% increase in revenue per unit (RPU). All three traffic groups saw RPU improvement, with coal RPU up 9%, merchandise RPU up 5%, and intermodal RPU up 3%, excluding fuel. The company emphasized its improving pricing, reiterating its commitment to price to the value of its improving service (our channel checks indicate that NS has been firm on raising its pricing as well). Pricing is expected to be the largest driver of growth projections, with 2H19 RPU likely to increase despite lower diesel rates, difficult y/y comparisons, and the impact of lower seaborne pricing in the export market.

“Management expects modest volume, RPU and revenue growth in 2H19, but weighted more to 4Q. Intermodal volume should be up slightly for the full year, while coal is likely to continue to decline compared to 2018. The company remains confident about achieving at least a 100 bps OR improvement this year. We have modeled for a 140 bps improvement followed by a 200 bps improvement next year. Management continues to have a longer term OR target of 60% by 2021. While the operating improvements will assist in driving costs down so too will lower headcount. NSC pulled out 1,200 additional heads in the quarter, half of which were placed on furlough. Of the remaining permanent reductions, half of those came from the trainee category (which is lower cost per employee).

“We are fine tuning our 2019 EPS estimate to $10.80, from $10.85, in order to reflect the $0.08 miss to our estimate in 2Q19, partly offset by a slightly better second half outlook than we had previously modeled. Our 2020 EPS estimate of $12.30 remains intact. Our price target is also unchanged based on the same 18.5x multiple to our 2020 EPS estimate.”

Download NS’s 2Q19 Financial Data: 2q2019_financial_data