A Close Look At Norfolk Southern’s Strategy 2020

Norfolk Southern Corp. (NYSE:NSC), the Virginia-based railroad company, posted a strong improvement in its 2017 results last week, beating the market expectations for both revenue as well as earnings. This remarkable performance was driven by higher coal and intermodal shipments backed by favorable government policies and tightening truck capacity. This, coupled with the company’s efforts to reduce its operating costs, resulted in a remarkable jump in its adjusted earnings for the year. While the company expects these favorable trends to continue in the near future, it is preparing itself to magnify the impact of these by a well-laid out strategic plan for the next few years. Below, we discuss the company’s strategy going forward and its impact on its valuation using our interactive platform.

See Our Complete Analysis For Norfolk Southern Corp. Here

Steady Volume Growth

• Similar to other railroad companies, Norfolk is optimistic about its volume growth in 2018. The company expects the intermodal markets to grow strongly due to the tightness in the trucking capacity because of the implementation of the Electronic Logging Devices (ELDs) policy, along with the increasing consumer demand and continued shifts to e-commerce.
• Further, the company anticipates the coal shipments to remain strong due to favorable policies and higher gas prices, though the pace of growth may be subdued compared to 2017. Besides, the rebound in industrial production and construction activity could boost the shipments during 2018.
• Also, 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. However, 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.
• Overall, Norfolk expects its volumes as well as pricing to grow at a compounded annual rate of around 2% through 2020.

Reducing Operating Costs

• Norfolk has been rationalizing its work force, improving fuel efficiency through longer train lengths, and reducing its support costs in order to bring down its operating ratio. A lower operating ratio (operating expenses as a percentage of total revenue) would result in higher operating profits for the company and its investors.
• In fact, the company has managed to reduce its operating ratio on a year-on-year basis for eight consecutive quarters. Given the impressive results from its cost reduction initiatives, the company aims to deliver productivity gains of $650 million and reduce its operating ratio to less than 65% by 2020 or sooner. This would enhance the company’s profits, and thereby its overall value in the long term.

Double Digit Earnings Growth

• With a steady growth in the top-line, coupled with a consistent reduction in the operating costs, Norfolk expects to achieve double digit earnings growth in each of the next few years. The company has already shown remarkable improvement in its profitability over the last two years, and we estimate that it is well-placed to achieve this target.

Focused Capital Investment

• Over the last couple of years, Norfolk has been focusing its capital spending on the maintenance of its rail infrastructure, terminal expansions to accommodate volume growth, and support economic growth in general.
• Going forward, the company plans to invest $1.8 billion, roughly 16%-18% of its revenue, to enhance the safety of its rail network, improve its service and operational efficiency, apart from augmenting economic growth in its region of operation.

Rewarding Shareholders

• As has been the case in the past, Norfolk will continue to reward its shareholders in the form of dividends and share repurchase. The company has a targeted dividend payout of 33% for the longer term with continued dividend growth at a steady rate. Interestingly, the company’s dividend payout was more than 33% in 2016 and 2017.
• Further, the railroad company plans to repurchase a significant portion of its shares over the next few years. The company has already repurchased $1.8 billion worth of shares in 2016-2017 time-frame.
• Thus, we figure that the company is dedicated towards its objective and is likely to enhance its shareholder returns in the coming years.

You can create your own assumptions and visualize its impact on Norfolk’s valuation using our interactive platform.

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