NS Sets 3Q Operating Ratio Record

Written by Andrew Corselli
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Norfolk Southern Corp. (NS) reported 3Q19 financial results, including a 3Q record operating ratio of 64.9%, as well as a net income of $657 million and diluted earnings per share of $2.49.

These results, NS noted, include a $32 million write-off of a receivable resulting from a legal dispute, which negatively impacted the operating ratio by 110 basis points and EPS by $0.09.

“Our team achieved a record third-quarter operating ratio while successfully rolling out the first phase of our TOP21 operating plan, followed by the swift transition to the plan’s second phase,” said James A. Squires, NS Chairman, President and CEO. “These efforts produced an 11% reduction in crew starts and recrews compared to the third quarter of last year, robustly outpacing the 6% volume decline while maintaining resilient service that supported an 11th consecutive quarter of year-over-year revenue-per-unit growth.

“Initiatives to reimagine mechanical operations while maintaining a more efficient fleet of locomotives and railcars also progressed, as these and other efforts delivered significant cost savings this quarter. Looking ahead, additional productivity will be generated as we advance to the third phase of TOP21 and execute initiatives surrounding fuel efficiency, distributed power, intermodal operations and our mechanical network, just to name a few.”

NS 3Q19 Results:

  • Railway operating revenues of $2.8 billion decreased 4% compared with 3Q18, as a 2% increase in average revenue per unit partially offset a 6% decline in total volume.
  • Railway operating expenses were $1.8 billion, a decrease of $82 million compared with the same period last year. Lower compensation and benefits, equipment rents and fuel prices were partially offset by a $32 million write-off of a receivable resulting from a legal dispute and increased depreciation expense.
  • Income from railway operations was $1 billion, a decrease of $24 million year-over-year. The railway operating ratio was a third-quarter record 64.9%, despite the unfavorable impact of 110 basis points related to a legal dispute.
  • Increased quarterly dividend by 9% from $0.86 to $0.94 per share.

Cowen Insight


“NS delivered 3Q19 EPS from continuing operations of $2.58, above our estimate of $2.54 and just shy of consensus of $2.59,” according to Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “Operating income grew 1% to $1.028 billion, just about our $1.024 billion estimate but shy of the Street forecast of $1.037 billion. Revenue declined 4% to $2.841 billion, compared to our and consensus estimates of $2.851 billion and $2.845 billion, respectively. The operating ratio improved ~157bps y/y to 63.8% and was 30bps better than our estimate, but 20bps worse than consensus.”

“With traffic declines showing no clear sign of abating and 2H revenue trending below expectations, and with a host of unusual costs ($25 million in 4Q and a $32 million receivables write-off in 3Q), NS is now unlikely to achieve its earlier goal of a 100bps OR improvement in 2019,” the analysts noted. “Even without the nonrecurring items in 3Q and 4Q, the 100bps improvement would still be unlikely. We are now modeling for a modest 28bps improvement to 65.2% in 2019 and a 267bps improvement in 2020.”

“We are lowering our 2019 and 2020 EPS estimates to $10.00 and $11.60, from $10.45 and $12.00, respectively,” the analysts added. “This is primarily driven by persistent freight demand weakness. Our price target drops from $222 to $215 based on the same 18.5x multiple to our new 2020 EPS estimate.”

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