NS: “Momentum Will Support Continued Value Creation”

“We are moving quickly to lead the industry in innovation, launching our Digital | NS initiative, and building the digital railroad of the future.” – Jim Squires

Norfolk Southern (NS) reported 4Q19 and full-year 2019 financial results, with a net income of $666 million and a diluted earnings per share of $2.55 for 4Q19 and $2.72 billion and $10.25, respectively, for the full year.

During the first year of a three-year strategic plan, NS produced a record operating ratio of 64.7% while managing the headwinds of a 5% decline in carload volumes. For the year, its operating revenues of $11.3 billion declined 1 % as overall volumes were down 5%, reflecting carload declines in all major commodity categories. NS’s operating ratio was a record 64.7% for the year.

“Norfolk Southern’s strong financial performance in a year of macroeconomic headwinds is underpinned by the hard work of our team to expeditiously implement productivity initiatives throughout the year,” said James A. Squires, NS Chairman, President and CEO. “With efficiency-related cost savings gaining steam in the third quarter and increasing in the fourth quarter, we achieved a record full-year operating ratio while also producing all-time best delivery performance for customers. This was the result of extensive system-wide planning integrated with customer communications during the first half of the year that created a foundation for the flawless execution of the initial two phases of our PSR-based operating plan, TOP21, in the second half. The momentum we’re carrying into 2020 will support continued value creation as we remain dedicated to the operational transformation of our business while ensuring we have a platform for growth as we look beyond the current freight cycle.”

4Q19 Summary

• Railway operating revenues of $2.7 billion decreased 7% compared with 4Q18, driven by a 9% decline in total volume. 
• Railway operating expenses were $1.7 billion, a decrease of $90 million compared with the same period last year. Lower compensation and benefits, fuel costs, equipment rents and materials usage were partially offset by lower gains on operating property sales and increased purchased services expense. 
• Income from railway operations was $1 billion, a decrease of $116 million year-over-year. The railway operating ratio was 64.2%.

2019 Summary

• Railway operating expenses of $7.3 billion decreased $192 million, or 3%, compared with last year. Lower compensation and benefits, fuel costs, equipment rents and materials costs were partially offset by lower gains on operating property sales as well as increased purchased services and depreciation expense. 
• Income from railway operations was $4 billion, a 1% increase year-over-year, and an all-time record.

Download Norfolk Southern’s earnings presentation:

The Cowen Insight

“NS posted a strong operating ratio that pushed an EBIT and EPS beat relative to our and consensus estimates,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Continued cost-cutting and a renewed focus on taking intermodal share from the highway should help make the company’s flat revenue guidance achievable. We slightly increase our estimates and move our price target up to $235.

“NS delivered 4Q19 EPS from continuing operations of $2.55, well above our estimate of $2.21 and consensus’ $2.28 expectation. Operating income decreased 11% y/y to $962 million, above our and consensus’ $895 million and $925 million estimates, respectively. Revenue declined 7% to $2.69 billion, just slightly below our and consensus estimates of $2.71 billion and $2.70 billion, respectively. The operating ratio improved ~147bps y/y to 64.2%, was ~270bps better than our estimate, and was ~150bps better than consensus.

“On a revenue basis relative to consensus, intermodal and coal slightly beat while general merchandise slightly missed. Total carloads decreased 9%, a slightly steeper decline than consensus’ expectation of a 7.8% decline, while revenue per carload increased at 2.3%, above the Street’s 1.4% expectation.

“Like its Eastern peer CSX, NS discussed the challenges facing its coal franchise, in addition to coal being a secular decline. With low natural gas and seaborne coal prices, Met Coal roughly 30% below its 1H19 price, and with difficult comparisons in 1H20, the business will likely be challenged. As a result, we have incorporated an even more conservative coal volume and pricing outlook into both our NS and CSX models for 2020.

“In contrast to coal volumes (which NS cannot control due to a secular decline), gaining share in intermodal is much more in NS’s control and on its conference call, the railroad seemed more open to doing so. This comes after the Class I walked away from intermodal origin/destination pairings at the outset of their Precision Scheduled Railroading implementation. However, with rail volumes lagging, Class I’s are looking to add truck-competitive volumes, especially as a potential 2H20 trucking recovery with a large increase in trucking prices looms large. More important, if NS can keep improving its service levels with its PSR implementation, it should be able to make its intermodal product more reliable. It is this increased reliability that will likely matter more for potential modal shifts back to the railroad.

“We are raising our 2020 and 2021 EPS estimates to $11.35 and $12.70, from $11.25 and $12.50, respectively. This is primarily driven by persistent freight demand weakness. Our price target increases to $235 from $231 based on the same 18.5x multiple to our new 2021 EPS estimate. We continue recommending shares of NS.”