Morningstar | Norfolk Southern Continues to Improve, but Lags Peer Progress in Operating Ratio Performance
Like the other large North American railroads reported this quarter, Norfolk Southern delivered strong revenue and improved its operating ratio, but we think investors are most focused on near-term plans for precision scheduled railroading implementation--the principles that pioneering CEO Hunter Harrison deployed to turn around CN, CP, and CSX. Indeed, these are good days to be a railroad, but Norfolk is not progressing as fast as its competitors. We maintain our wide moat rating for Norfolk and expect any increase to our fair value estimate to be modest.Norfolk improved fourth-quarter total volume by 3% and revenue per unit by 5% to drive revenue up by 9%, and improved its operating ratio to 62.8%. However, when we back out $145 million of gains on property sales (the prior-year period included just $25 million), the OR improved 140 basis points to a less impressive 67.8%. Still, Norfolk improved quarterly diluted EPS a sharp 52% year over year. Full-year EBIT and reported OR (65.4%) were record bests for the firm, and yearly EPS improved 44%. What stood out most to us in the full year was 7% growth in both intermodal units and chemicals carloads. Also, the rail increased intermodal pricing a steep 10% during 2018.
What of the operating transformation, then? Clearly Norfolk is progressing, but its OR is weaker than peers. It handled record carloads and gross ton miles during 2018, yet in the fourth quarter stored 300 locomotives and returned 100 on lease. Fuel efficiency and train length were record highs in 2018. However, Norfolk’s OR lags the other Class 1 railroads and Eastern competitor CSX generated far better fourth-quarter and annual ORs (60.3% for both periods), particularly considering Norfolk’s gains on real estate sales as nonoperating factors. Further, Norfolk expects capital spending to remain 16%-18% of revenue when most peers are ratcheting down from this by several percentage points. More to come at Norfolk’s Feb. 11 investor meeting.
Norfolk Southern is a holding company. Through its subsidiaries, the company is engaged in the rail transportation of raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of the United States. The company also transports overseas freight through several Atlantic and Gulf Coast ports. The company provides intermodal network in the eastern half of the United States. The company's railroad operates in several states and the District of Columbia. The company's system reaches manufacturing plants, electric generating facilities, mines, distribution centers, transload facilities, and other businesses in its service area.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.