Morningstar | Norfolk Southern Hires VP Transportation With Precision Railroading Experience; Maintain FVE
We're maintaining our fair value estimate for Norfolk Southern and already bake into our model substantial operating ratio (OR) improvement, but we note a positive development announced yesterday. Norfolk named Mike Farrell senior VP transportation effective immediately.The two large public railroads that have not yet implemented precision scheduled railroading (PSR) in recent months have indicated they are adopting this methodology, but both Norfolk Southern and Union Pacific seemed to us to be doing so in a slower, more gradual cadence compared with other railroads, and this we find unlikely to fully satisfy investors. We think any railroad C-suite that wants to keep its employment needs to swear allegiance to PSR due to its proven success in dramatically turning around the Illinois Central, Canadian National, Canadian Pacific, and (underway) CSX. Investors see no reason not to try this system at all remaining railroads, and we agree. In our note on Norfolk Southern's most recent quarterly results, we indicated disappointment that the firm had not hired an experienced expert to accelerate the adoption of precision scheduled railroading. Hiring Farrell as COO satiates this frustration because while Farrell has been consulting Norfolk for a year, prior to this he worked in senior operations management at CP and CN when these firms were using PSR.
We already model 100 basis points of OR improvement during each of the next four years. Employee count is a major OR lever, and headcount this quarter was about 1% lower than in the prior-year period. When other railroads have adopted PSR, employee count declined as much as 25%, but Norfolk started some rightsizing a couple years ago. All in, we consider the Farrell hire likely to increase the probability that Norfolk Southern improves its OR as rapidly as possible. He reports to COO Michael Wheeler--time will tell if Farrell can effectively implement PSR without holding the highest operating authority.
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.
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