The railroads have done it again! Displaying dazzling resilience through all phases of the business cycle, these icons of American industry continue to haul their weight in gold when it comes to delivering shareholder value quarter after quarter.
Choosing a favorite among the group is a bit like selecting a favorite member of The Beatles. They are each incredibly talented in their own right, and the real magic happens when you hear them all together. Although Norfolk Southern (NYSE: NSC ) is my top pick on the rails, the seemingly unstoppable momentum of the entire group of North American railroads is like music to investors' ears no matter which operator they may prefer.
Aggressive share buybacks reduced Norfolk's average share count by 7.7% compared with the prior-year quarter, turbocharging a 26% increase in net earnings into a phenomenal 37% increase in earnings per share. Competitor Union Pacific (NYSE: UNP ) ripped up the rails in 2011 with a similarly impressive campaign of share repurchases, and enjoyed a 39% surge in per-share-profits. CSX (NYSE: CSX ) unloaded a more modest net profit increase of 14% for the first quarter, but its own lower share count yielded a full 23% growth in earnings per share. These locomotives are busy loading the pockets of investors with enhanced shareholder value, and paying dividends all along the way!
Norfolk Southern improved its operating ratio all the way to 73.3% from 77.1% in the prior-year period. That's a fairly studly performance, but Canadian National Railway (NYSE: CNI ) is tough to beat on the margins with a ratio of 66.2%. For investors who may be new to the railroads, this metric is simply the mirror image of the operating margin; so Norfolk Southern's ratio of 73.3% corresponds to an operating margin of 26.7%.
All eyes on coal
Heading into this earnings season, all eyes were trained (pardon the pun) on the impact of the deeply impaired domestic coal market upon the railroads' bottom line. While the gut-wrenching collapse in coal-mining shares may have led one to expect the worst, I found the damage surprisingly tame. Although coal volumes hauled by Norfolk Southern sank by 11%, stronger per-unit pricing softened the blow to just a 6% decline in revenue from coal.
Norfolk also provides an insightful breakdown of coal volumes by their destination market, which revealed a meaningful 21% increase in tons of metallurgical coal hauled to domestic steelmakers. That met-coal strength absorbed much of the blow from a 17% decline in thermal coal bound for domestic utilities, and a 10% drop-off from last year's celebrated surge in exported coal. Norfolk Southern's Eastern-U.S. rail network, it's worth noting, covers the hardest-hit Appalachian coal basin, where leading producer Alpha Natural Resources (NYSE: ANR ) , among others, scaled-back some production during the quarter.
Although I happen to prefer Norfolk Southern for its exemplary environmental initiatives and proven execution on all operating fronts, in truth I believe investors are likely to enjoy resilient strength from any of the continent's quality haulers. An argument could be made, moreover, for a western-focused operator with less exposure to the more deeply impaired U.S. coal basins. So while you're deciding whether you prefer John, Paul, George, or Ringo, don't forget to appreciate the music they made as an ensemble.