Norfolk Southern (NS) in second-quarter 2021 delivered “another solid performance of sequential operating ratio improvement,” Chairman, President and CEO James A. Squires said July 28 during an earnings announcement. Revenue and volume rebounded from last year, he reported, up 34% and 25%, respectively.
NS reported record second-quarter net income of $819 million and diluted earnings per share of $3.28, and an all-time quarterly record OR (operating ratio) of 58.3%. (First-quarter 2021 OR was 61.5%.)
Railway operating revenues for the quarter came in at $2.799 billion, up 34.24% from the prior-year period’s $2.085 billion, driven by a 25% increase in volume and a 7% increase in revenue per unit.
Railway operating expenses were $1.632 billion, an increase of 10.64% over second-quarter 2020’s $1.475 billion.
Income from railway operations, NS reported, was an all-time quarterly record of $1.167 billion, up 91% from $610 million year-over-year.
Looking ahead, NS noted that for revenue, it expects “increasing year-over-year growth” from approximately 9% to 12%, with intermodal and merchandise as the “leading growth drivers.” It noted that coal will have a “near-term upside” and a “long-term secular decline.” Additionally, the railroad noted that for OR, it anticipates “increasing year-over-year improvement from >300bps to 400bps-440bps.” Capex is expected to reach approximately $1.6 billion.
“Leveraging the strong and diverse book of business we have developed, we will build upon our success in the creation of long-term, sustainable value for our customers and shareholders,” Squires said.
Cowen Insight: ‘Reasonable Back-Half Expectations After Solid 2Q’
“NSC [NS] posted a second-quarter beat that was above our expectations, as strong revenues, higher asset sales and a lower tax rate drove the beat,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “As we look ahead, we expect tight capacity to continue with some manageable expenses in the back half of the year, slightly better than our previous expectations. We raise our EPS expectations and push our PT to $301—reiterate Outperform.”
Cowen’s Key Takeaways:
• “NSC reported 2Q EPS of $3.28, coming in ahead of our forecast and consensus expectations of $2.96. NSC benefited $0.17 from a $55MM property sale, and $0.09 from a 2021 state tax law change (which will continue going forward); while NSC typically sees property sales in each quarter, this was higher than their normal yearly operating property gain guidance of $30MM-$40MM. OR in the quarter of 58.3% beat our estimate of 60.2% (property sale contributed 200 bps positively 2Q OR, which is baked into guidance).
• “Carloads in the quarter grew 25%, led by automotive at 122% (due to weak comps that management expects to decline sequentially as chip shortage continues), and coal at +55%, which we believe will continue through the remainder of the year, while leveling off over the long term. Intermodal trends continue to improve with revenues up 41% y/y off strong volume and yield growth, which we expect to continue through the remainder of the year. There is typically a lag in long-term contracts on intermodal pricing, and management is confident in a strong pricing environment through this year and next; NSC does not have a large exposure to the spot market. We do, however, expect some benefits from demurrage assessorial charges to ease as supply chain tightness abates.
• “NSC’s guidance increased to 12% y/y top-line growth, which insinuates some sequential revenue declines in the back half of the year, as mix negatively affects yields, and a normalization of volume trends. Management anticipates 400-440bps of OR margin improvement on a full-year basis; we currently model approximately 420bps of margin improvement to 60.2% for 2021, improving slightly from our previous OR estimate of 60.5%. We model purchased services and materials to continue to step up over the back half of the year, mainly due to elevated volumes.
• “NSC repurchased 3.4MM shares in the quarter as management remains committed to its buyback program, and we model for the company to continue leaning into its share repurchase program. In the first six months of the year, NSC repurchased $1,525MM of stock and paid $496MM of dividends.
• “We are adjusting our 2021 and 2022 EPS estimates to $12.05 from $11.60 and to $13.70 from $13.50, respectively. Using our 22x multiple and our new 2022 EPS estimate, our price target goes to $301 from $297 and reiterate Outperform.”