Norfolk Southern’s Earnings Surge Backed By Higher Coal And Intermodal Shipments

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Norfolk Southern

As expected, Norfolk Southern Corp. (NYSE:NSC), the Virginia-based railroad company, reported a strong set of financial numbers for the December quarter and full year 2017 on 24th January 2018((Norfolk Southern Announces Fourth Quarter 2017 Earnings, Norfolk News Release)). The company posted a notable improvement in its revenues driven by higher coal and intermodal shipments backed by favorable government policies and tightening truck capacity. Further, the company’s efforts to reduce its operating costs resulted in a remarkable jump in its adjusted earnings for the year. Despite this, the company’s stock traded slightly lower than the previous day. We believe that this is a temporary drop as the company’s strategy to enhance its margins and returns over the next 3-4 years is likely to reap fruits and drive its valuation. We currently have a price estimate of $148 per share for the company, which is slightly lower than its market price.

See Our Complete Analysis For Norfolk Southern Corp. Here

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Key Highlights of 4Q’17 Earnings Release

  • Norfolk’s 2017 revenue grew to $10.55 billion, almost 7% higher on an annual basis, driven by a combination of volume gains in intermodal, coal, and steel shipments. The company’s intermodal revenue rose sharply due to the tightening truck capacity, high demand for consumer goods, and improved higher fuel surcharges and pricing through the year.
  • Further, the railroad company witnessed a surge in coal shipments and pricing due to favorable policies, stronger demand, and rising natural gas prices throughout the year. While the increase in steel production and drilling activity led to a rise in Norfolk’s merchandise volumes, its impact was partially offset by lower US light vehicle production and reduced pipeline activity.
  • The company’s unrelenting focus on enhancing productivity through labor rationalization and fuel efficiency enabled it to generate $150 million in productivity savings in 2017, on top of $250 million in 2016. This resulted in an operating ratio of 66.7% in the fourth quarter, the eighth consecutive quarter of a decline in the operating ratio. For the full year, the company’s operating ratio fell to 67.4%, causing its adjusted earnings to increase to $6.61 per share, 18% higher than the previous year.

  • Norfolk spent around $1.7 billion in capital expenditure in 2017, focusing on the maintenance of its rail infrastructure, terminal expansions to accommodate volume growth, and support economic growth in general. Going forward, Norfolk plans to invest $1.8 billion, primarily to enhance the safety of its rail network, improve its service and operational efficiency, apart from augmenting economic growth in its region of operation.
  • Additionally. the company’s management has increased its quarterly dividend from $0.61 to $0.72 per share, translating into a rise of 18% on a year-on-year basis. Further, Norfolk repurchased 8.2 million shares at a cost of $1 billion during the year. This implies that the company is willing to share its growth with its shareholders, which is likely to boost investor’s confidence in the company.

Going forward

  • For 2018, Norfolk expects the intermodal markets to grow strongly in the coming year due to the tightness in the trucking capacity due to the full implementation of the Electronic Logging Devices (ELDs) in trucks, along with the increasing consumer demand and continued shifts to e-commerce.
  • In terms of the merchandise markets, growing industrial production and construction activity could boost the shipments during 2018. Further, the recovery in commodity markets is likely to boost drilling activity and shipments through the year, apart from causing an improvement in fuel surcharge revenue.
  • Moreover, Norfolk expects the coal shipments to continue to grow due to favorable policies and higher gas prices. Although the pace of growth may be subdued compared to 2017.
  • Lastly, the automotive volumes are expected to remain low due to weakness in US light vehicle production, which is likely to partially offset the impact of higher volumes of other segments.

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