Norfolk Southern Posts Strong 3Q’17 Earnings By Reducing Its Operating Ratio To A Record Low

by Trefis Team
Norfolk Southern
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As expected by the market, Norfolk Southern Corp. (NYSE:NSC), the Virginia-based railroad company, released a solid financial performance for the September quarter on 25th October 2017((Norfolk Southern Announces Third Quarter 2017 Earnings, Norfolk News Release)). The company exceeded the consensus estimate for both revenue and earnings, driven by volume and pricing improvements in all three business units. Although the company reduced its operating ratio to a record level of 65.9%, the company’s stock dropped more than 2.5% post the announcement of the results, since the market seemed concerned about the company’s rising fuel and compensation expenses despite a reduction in headcount during the quarter.

See Our Complete Analysis For Norfolk Southern Corp. Here

Key Highlights of 3Q’17 Earnings

  • Norfolk’s revenue grew to $ 2.67 billion, almost 6% on an annual basis, driven by a combination of volume gains in intermodal, coal,  and steel, and increased pricing in all three divisions. Coal freight volumes increased 12% compared to the same quarter of last year, driving the majority of the company’s revenue growth. However, its international business declined slightly due to the hurricane disruptions during the quarter.
  • Merchandise volumes dropped around 1% in the third quarter as gains in steel, sand, and fertilizers were more than offset by lower automotive shipments associated with US vehicle production declines and reduced crude oil shipments.
  • On the cost side, the company managed to restrict its operating cost growth to 3%, causing its operating ratio, (operating expenses as a % of revenue), to decline to 65.9% for the quarter, an all-time quarterly record for the company. This is the company’s seventh  consecutive quarter where it has managed to lower its operating ratio on a year-on-year basis.

Source: NSC’s 3Q’17 Presentation

Going Forward

  • Norfolk foresees strong growth in its intermodal shipments as the already tight trucking capacity is likely to be further impacted by the Electronic Logging Devices (ELD) implementation beginning in December of this year.
  • Further, the company aims to pull more business from its rival CSX Corporation (NYSE:CSX), similar to the September quarter, by continuing to work closely with clients and devising new solutions for their requirements, along with maintaining the quality of its services.
  • The railroad company targets to increase its cost savings to over $650 million by 2020 from $130 million in 2016. This is likely to enable the company to achieve its sub-65% operating ratio objective by 2020, or even sooner.

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