NS 3Q21: Record Quarterly Results (UPDATED, Cowen)

Despite significant supply chain disruptions, Norfolk Southern (NS) delivered “a strong financial performance” in third-quarter 2021, Chairman, President and CEO James A. Squires said during an Oct. 27 earnings announcement.

For the three-months ended Sept. 30, 2021, NS posted railway operating revenues of $2.85 billion, rising 14% compared with the prior-year period, which the railroad attributed to a 14% increase in revenue per unit. Volumes for third-quarter 2021 were flat with 2020.

Other third-quarter 2021 highlights:

• Net income was $753 million, up 32% from the $569 million posted in third-quarter 2020.

• Diluted earnings per share came in at $3.06 vs. the prior-year period’s $2.22.

• Operating ratio was 60.2%, a third-quarter record, and an improvement of 630 basis points over third-quarter 2020. “Last year’s results included a $99 million impairment charge related to an equity method investment,” NS reported. “Excluding the effect of the impairment charge in third-quarter 2020, the operating ratio improved 230 basis points over the adjusted results for third-quarter 2020.”

• Income from railway operations was a third-quarter record of $1.136 billion, up 35% from last year’s $840 million. “Excluding the effect of the impairment charge in third-quarter 2020, income from railway operations was up 21%, or $197 million, on a year-over-year adjusted basis,” NS said.

• Railway operating expenses were $1.716 billion, an increase of 3% from third-quarter 2020’s $1.666 billion. “Excluding the impairment charge, operating expenses were up 10%, or $149 million, compared with adjusted operating expenses in the third quarter of 2020, driven by higher fuel, purchased services and compensation and benefits expenses.”

2021 Outlook

Looking ahead, NS reported that for revenue, it expects a year-over-year growth of greater than 12%, with Intermodal and Merchandise as the drivers. For operating ratio, it anticipates a year-over-year improvement in the range of 400-440 bps. Capex is slated to reach approximately $1.6 billion.

The NS Investor Relations page provides more details.

THE COWEN INSIGHT

“Norfolk Southern reported a 3Q21 above our estimates and consensus expectations, raising top line 2021 guidance with strong OR improvement in an environment when we have seen other Class I’s retract/reduce guidance, due to the supply/demand imbalance in the supply chain as we work through peak season,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “We increase our price target to $301 and reiterate Outperform.

“3Q21 adjusted. EPS of $3.06 came in above our forecast of $2.95 and the consensus forecast of $2.91. Total revenue increased 14% despite flat volumes (chemicals volume grew 24% and metals & construction volume increased 14%, offset by a 23% decline in automotive). Coal revenues increased 32% as export shipments increased significantly, which is expected to remain strong for the foreseeable future, although we are cautious (and model as such) for coal demand in 2022. Adjusted OR of 60.2% came in above expectations.

“On the pricing front, NS expects ~50% of its business to be re-priced over the next two quarters, with about 50% of that rolling over each year. Management highlighted that the spot truck market was up 21% in 3Q21, and conversations continue with shippers on their commitment to put more freight on rails, as ESG continues to be part of shippers’ decisions. We heard from other class Is that pricing should be well ahead of rail cost inflation in 2022, acknowledging inflation is a large area of concern when considering pricing. That said, we believe NS will be more than able to offset its rail cost inflation via pricing.

“As it pertains to 2021 outlook, we were encouraged to see NS increase top line guidance from 9%-12% to now greater than 12%, with near-term upside from coal. Adjusted OR guidance was re-affirmed at a 420bp improvement at the midpoint. This come at a time when we have seen some of NSC’s competitors (other Class I’s) retract or bring down guidance given the challenges we have seen, particularly on the intermodal and automotive front, over the last several months, which will likely continue through the remainder of the year.

“NS repurchased 3.6MM shares in the quarter and generated $2.3B in free cash flow in the first nine months of 2021, and management remains committed to continue leaning into its buyback program after considering financial leverage, and we model as such. NS maintained its capex guidance of $1.6bn for the year. We have modeled for a slight increase in capex for 2022.“We increase our 2021 and 2022 EPS estimates to $12.08 from $12.00 and $13.70 from $13.55. Continuing to use our 22x multiple and our new 2022 EPS estimate, our price target goes to $301, and we reiterate Outperform.