Regional rail carrier Norfolk Southern (NYSE:NSC) surprised investors Wednesday with the strength of its fourth-quarter 2019 results, despite the headwind of slumping rail volumes. Adding to an already impressive run in the first few weeks of January, shares closed the day up 5% -- and has now surged 11% this month. Let's review highlights from the quarter, and consider the reasons behind this dividend-paying railroad's recent popularity among investors. (All comparative numbers below are presented against the prior-year quarter.)
Norfolk Southern's fourth-quarter results
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$2.7 billion||$2.9 billion||(6.9%)|
|Net income||$666 million||$702 million||(5.1%)|
|Diluted earnings per share||$2.55||$2.57||(0.8%)|
- Norfolk Southern's revenues suffered from a 9% drop in rail volume, in line with the recent trend of weaker shipments due to international trade disputes, declining coal production, and moderating U.S. economic growth.
- Merchandise shipment revenue dipped 3% to $1.63 billion, while intermodal revenue slipped by 8% to $697 million. Revenues from coal, the railroad's smallest segment, slumped by 21% to $363 million.
- Rail operating expenses decreased by 5% to $1.7 billion. Declines in fuel expenses as well as in compensation and benefits were slightly offset by an increase in outlays for purchased services and rents.
- The company's admirable expense control manifested in its operating ratio of 64.2%. Operating ratio is a measure of a railroad's productivity, and is derived by dividing total expenses by revenue for a given period. (The lower the ratio, the better). For the full year, Norfolk Southern achieved a record operating ratio of 64.7%.
- The company declared a regular quarterly dividend of $0.94 per share -- stretching its streak of payouts to 150 consecutive quarters.
Why Norfolk Southern shares rose, and may continue to rise
Though its revenue dropped by 7%, Norfolk Southern avoided an even steeper top-line slide due to its recent productivity efforts -- specifically, its implementation of Precision Scheduled Railroading, or PSR. PSR is a disciplined framework that aims to improve a railroad's operational efficiency through optimizing rail assets, enforcing strict scheduling, improving network routes and fluidity, and working more closely with rail customers to efficiently move cargo.
Norfolk Southern has completed two out of three phases of its PSR effort. In the earnings press release, CEO James Squires observed that the railroad has achieved its initial PSR goals through close communication with customers to avoid disruptions, and that it achieved an "all-time best delivery performance" during 2019. This is impressive as the initial steps of PSR projects can often result in delayed shipments as rail carriers begin to tweak their network routes.
Commonly watched metrics used to gauge operational efficiency illustrate the railroad's progress through the year. From January to December, average train speed increased from 21.8 miles per hour to 23.8 miles per hour. Even better, average terminal dwell time during the same period decreased from 23.4 hours to 18.9 hours.
The effect of PSR on the company's financials boosted Norfolk Southern stock on Wednesday. Investors were enthused by the company's bottom line, which exceeded expectations given its volume woes, and they're equally enticed by the probability that Norfolk Southern will wring more productivity from its operations. Competitors CSX and Union Pacific both recently reduced their operating ratios to the 60% level, indicating that Norfolk Southern can potentially boost profitability handsomely in 2020.
The ability to offset a tepid revenue situation with long-term operational improvements -- as opposed to temporary cost-cutting -- is prized among investors in industrial sector companies. Norfolk Southern, which pays a dividend currently yielding 1.7%, offers a relatively safe option for income-seeking investors in the transportation industry, with the promise of accelerated earnings growth once rail industry volumes revive.