NS 4Q20: ‘More Opportunity Ahead’ (Updated, Cowen)

“We have set the stage to drive further efficiency and profitable growth in 2021 through our precision scheduled railroading operating plan, which will deliver long-term value for both our shareholders and customers,” Norfolk Southern Chairman, President and CEO James A. Squires said.

For Norfolk Southern (NS), fourth-quarter net income of $671 million rose nearly 1% from the year-earlier period’s $666 million, and its 61.8% operating ratio was “all-time quarterly record,” the Class I railroad reported Jan. 27.

Among other fourth-quarter highlights:

• Railway operating revenues of $2.6 billion fell 4% vs. fourth-quarter 2019, “driven by a 1% decline in volume, lower fuel surcharges and differing business mix,” according to NS.

• Railway operating expenses were $1.6 billion, falling 8%, or $139 million, compared with the same period last year. “Lower fuel costs, compensation and benefits, and purchased services were partially offset by lower gains on property sales,” the railroad said.

• Income from railway operations was $1.0 billion, up 2%, or $22 million, year-over-year.

2020 Results

Full-year net income was $2.0 billion, down 26% vs. $2.7 billion in 2019. The operating ratio for 2020 was 69.3% vs. the record of 64.7% set in 2019. Excluding a first-quarter-reported non-cash locomotive rationalization charge of $385 million and a third-quarter-reported non-cash investment impairment charge of $99 million, adjusted 2020 net income was $2.4 billion and the adjusted operating ratio improved to 64.4%, vs. 2019.

Among other 2020 highlights:

• Railway operating revenues of $9.8 billion declined 13% “as volume was down 12% year-over-year, reflecting declines in all major commodity categories driven by the global pandemic,” the railroad reported.

• Railway operating expenses of $6.8 billion decreased $520 million, or 7%, vs. 2019. Lower fuel costs, compensation and benefits, purchased services, and materials costs were partially offset by the non-cash locomotive rationalization charge and non-cash impairment charge related to an equity-method investment, NS said. Excluding the charges, adjusted operating expenses decreased by $1.0 billion, or 14%, compared to 2019, according to NS.

• Income from railway operations was $3.0 billion. Excluding the non-cash locomotive rationalization and investment impairment charges, it was $3.5 billion, adjusted.

“As we take stock of what we achieved in 2020 while managing both the pandemic and energy market challenges, including the successful idling of four additional hump operations while driving productivity to record levels, we see much more opportunity ahead,” Norfolk Southern Chairman, President and CEO James A. Squires said. “We have set the stage to drive further efficiency and profitable growth in 2021 through our precision scheduled railroading operating plan, which will deliver long-term value for both our shareholders and customers.”

2021 Outlook

NS reported capex of approximately $1.6 billion for 2021. The railroad also said it expects to see an approximately 9% year-over-year growth in revenue, with intermodal and merchandise as the “leading growth drivers.” For coal, a “secular decline continues,” the railroad noted. As for operating ratio, the railroad said it expected a “greater than 300 basis point improvement in 2021, vs. 2020 adjusted OR.”

The NS website provides more earnings details.

Cowen Insight: ‘Line of Sight for More OR Improvement’

Norfolk Southern (NSC) “achieved an earnings beat and ended 2020 with a flat OR despite significant market disruption,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “E-commerce and consumer-driven business led to carload growth for its Intermodal segment that was more than offset by a decline in Coal and Chemicals in 2020. We reiterate our Outperform rating and increase our price target to $227 from $254.”

Cowen’s Key Takeaways:

• “Norfolk Southern reported 4Q EPS of $2.64, up roughly 4% from the prior year and ahead of our ($2.44) and the Street’s ($2.48) forecasts. Revenues fell roughly 4% to ~$2.6BN due to a ~1% decline in volumes and ~3% decline in yields (average revenue per carload).

• “Operating income in the quarter of $984M came in above the consensus forecast of $955M as OR improved ~250 bps in the quarter. The volume decline in the quarter was driven by a 24.6% decline in Coal and a 21.3% decline in Chemicals. Off an annualized volume decline of 37% for Coal and 19% decline for Chemicals, we anticipate a rebound for its Chemicals (8%) segment and roughly flat for Coal. According to our carload data, QTD trends for Coal and Chemicals are -8% and -9.3% respectively. We note continued strength in both its Intermodal segment and Ag. segment in our carload data. Management’s outlook on coal remains pressured by stockpiles that will likely result in lower volumes, partially offset by export thermal and domestic volume increases correlated with the post-COVID recovery. All in, management expects revenue growth as overall conditions will likely improve through the year; we are currently modeling 9% top line growth for 2021.

• “NSC expects steady recovery in manufacturing activity that should support inventory rebuild and increasing demand. With inventory levels still low, and favorable consumer spending forecasts, NSC sees continued growth in its Intermodal segment, which we concur and have modeled 8% growth for 2021.

• “With a net positive outlook on the macro-landscape, management expects to achieve more than 300 bps of OR improvement in 2021; we are currently modeling a ~330 bp improvement in 2021 to 61.1%. Much of 2020 was spent taking out structural costs in the network. The railroad is still looking to do some more of that, however 2021 will likely be a year that focuses on train weights/lengths, productivity, blocking and traffic blending to maximize margins as traffic comes back on their lines.

• “We are modestly adjusting our 2021 and 2022 EPS estimates to $11.20 from $11.40 and $13.00 from $12.80, respectively. Our multiple that we apply to our 2022 outlook increases to 19.5x due to continued execution, which moves our PT to $254 from $224. We reiterate our Outperform rating on NSC.”