EUR 850.00 For Business Accounts Only

Morningstar | Norfolk Southern's Operating Improvement Execution Looks Solid, Despite Little Help From Volume

Norfolk Southern improved its first-quarter reported operating ratio to 66.0% from 69.3%, increased operating income 16%, and increased net income 23% on flat carload volume. Operating income, net income, earnings per share, and OR were all first-quarter record performances. Key to these strong results was the 4% increase in revenue per carload (excluding fuel), but we were also impressed by 14% improved train speed and terminal dwell that was 23% better than in the prior-year period. We expect to increase our fair value estimate as we update our valuation model to reflect our higher confidence in the pace of OR improvement, as well as solid 2019 pricing, and the time value of money since our previous update.

About two thirds of the growth in revenue dollars was in merchandise and one third was intermodal; coal sales were flat on 5% lower volume. However, among these three major segments, only intermodal expanded units (2%). We still expect coal to weaken this year via exports declining from last year’s high levels and secular weakening of domestic steam coal demand (due to cheap natural gas, which remains cheap, and renewables substitution). We also expect intermodal growth to persist but to slow its pace as the trucking capacity constraint eases during this year. As at other railroads, Norfolk continues to prune its intermodal offering to optimize lanes for service and profitability.

The firm has increased train speeds on several manifest routes, increased its use of distributed power, and focused on network balance. Norfolk reduced head count by 400 in the first quarter and expects to reduce by another 100 this calendar year. Major levers expanding margin this period were holding operating expenses flat while increasing revenue per unit and contending with the unfavorable mix shift of coal losses and intermodal growth.