Solid 3Q gains for Norfolk Southern

Norfolk Southern Corp. reported third-quarter net income of $506 million, up 10% on-year, as income from railway operations increased 11% to $911 million and the operating ratio fell to a quarterly record 65.9%. Earnings per share totaled $1.75, up 13% from the previous year.

“Norfolk Southern continues to deliver strong financial results through execution of our strategic plan. We are unwavering in our commitment to improve productivity as demonstrated by seven consecutive quarters of year-over-year improvement in our operating ratio,” said James A. Squires, Norfolk Southern chairman, president and chief executive. “Our balanced approach focuses on increasing efficiency and delivering a strong customer service product, giving us the ability to achieve our goals and deliver sustainable shareholder value.”

Railway operating revenues of $2.7 billion gained 6% as overall volumes were 4% higher, on growth in major commodity categories of coal and intermodal.

Operating expenses increased $55 million, or 3%, to $1.8 billion as targeted expense reductions and gains from the disposition of operating property helped offset volume and inflation-related expenses and higher incentive compensation.

Income from railway operations was $911 million, up 11% percent year-over-year, and the operating ratio, or operating expenses as a percentage of revenues, was 65.9 percent, an all-time quarterly record.

For the first nine months of 2017, net income was $1.4 billion, up 15% year-on-year. Record diluted earnings per share was 17% higher at $4.93. Operations income grew 11% while the nine-month operating ratio of fell to a record 67.4%.

“We remind investors that early this year NSC’s board put in place an accelerated turnaround incentive plan that would reward management if the turnaround accelerates,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, in a note to investors. “On July 18, the carrier announced the planned consolidation of its Central Division headquarters in Knoxville into three surrounding divisions, reducing the number of operating divisions on its system to 9 from 10. We believe further yard and track consolidation and streamlining of the network could occur as the company executes on its operational plan. This, coupled with a better pricing outlook for NSC, the ongoing turnaround attempts at competitor CSX and improving rail conditions could indeed mean NSC achieves its stated operational targets ahead of schedule, although we think this would still be done using what NSC has described as a measured approach.”

Seidl continued, “In addition to continuing to meet or exceed the operational improvement metrics it has set for itself, NSC has found itself in recent months in the envious position of gaining market share from its eastern competitor, as some shippers, disgruntled by CSX’s service challenges, look for alternatives. While CSX appears to have made some improvement in September and October, we believe it will be some time before service returns to optimal levels. NSC is likely to continue to have a more competitive service product in the east for the foreseeable future. Traffic results lend support to the notion that NSC has been taking market share.

“Our channel checks suggest that NSC was fairly selective in the freight it took on and demanded longer term commitments from some customers. Just over 40% of shippers in our aforementioned survey said they were paying up to 10% more for NSC for freight switched from CSX. A key point here is that we believe the percentage of the rail network in the east that is peer- and truck-competitive is materially greater than that north of the U.S. border where Mr. Harrison achieved two of his big successes. That said, conversion from the highway remains its biggest market share gain opportunity.”