Morningstar | Norfolk Southern Sets Quarterly EBIT Record, Best 2Q Operating Ratio but Not Nearly as Good as CSX's
Norfolk Southern grew operating income 18% to a record $1 billion and generated a 64.6% operating ratio, marking a 230 basis point improvement and the 10th consecutive quarter of year-over-year OR improvement. Clearly operating improvement is still under way, even if Norfolk's EBIT margin compares unfavorably to that of its eastern neighbor, CSX, which produced a second-quarter normalized OR a hair over 60%. We maintain our wide moat rating and expect any updates to our valuation model will yield a slightly higher fair value estimate.Strong volume has been a consistent theme across the rails, in fact across all U.S. transports this quarter. Norfolk Southern improved consolidated volume 6% and total revenue per unit by 4%--both respectable numbers (the latter includes increased fuel surcharges). In terms of sales, Norfolk grew intermodal revenue an astonishing 20% year over year, driven by the tight domestic trucking market and 13% growth in domestic intermodal. Merchandise revenue improved 8% on strong oil and gas activity, plus ethanol, fertilizer, and crude; only autos declined (volume negative 6%, but revenue positive 2%). Even coal sales grew 4% due to strong export demand (tons up 21%, but mostly in lower rate steam exports).
Norfolk is bringing aboard train and engine employees to keep pace with strong freight demand, and targets 1,800 hires this year. The firm also is increasing its 130 leased locomotives by 25 to stay fluid. Looking forward, Norfolk expects to improve train length (even as it set a record this quarter) and velocity, in order to reduce crew starts and necessary locomotives. Management anticipates reaching its sub-65% annual OR goal earlier than its 2020 target. This goal seems modest compared with CSX performance and we have some concern that a superior cost structure could enable CSX to go hunting near-term offering attractive rates, but Norfolk grew volume about three times greater than CSX this quarter.
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.