Railroad operator Norfolk Southern (NSC 0.17%) just posted Q3 revenue of $3.3 billion, a new company record and a 17% increase year over year. This was the result of replenished crews and increased efficiency. Norfolk Southern carried in 27% more profit than the same period last year.
Is now the time to buy the dip on Norfolk Southern? Despite the company setting revenue records, the stock is down roughly 25% from its December 2021 highs.
Modern freight transportation
With the goal of being the safest, successful, and most customer-focused transportation company in the world, Norfolk Southern has hauled America's freight since 1827. The historic railway remains a considerable carrier of industrial, agricultural, and consumer products.
Norfolk Southern boasts the most extensive network in the eastern U.S. and is the leading transporter of coal, automobiles, and automotive parts. The Atlanta-based railroad's "operations-driven" freight network delivers over 7 million carloads a year.
With company initiatives like locomotive fuel economy and the recycling of mechanical waste, Norfolk has taken major steps to reduce its environmental impact. Increasing railway efficiency using technology like artificial intelligence, machine learning, and data analytics, Norfolk Southern claims to prevent 15 million tons of carbon emissions per year by shipping via its rail network versus by truck. Buying Norfolk Southern stock could even be considered green investing.
In addition to being environmentally friendly, Norfolk Southern has optimized its rail network to be more consistent and efficient. Combined with service improvements and a modern locomotive fleet, Norfolk Southern was able to pad its profit margin by more than 2% in Q3, compared to last year. Improved staffing levels also helped contribute to Q3's impressive performance.
Staffing and union challenges
Surprisingly enough for a record quarter, Norfolk's volume was actually down in Q3 year over year. Overall, the Atlanta-based railway saw a 2% decline in volume. Coal shipments fell by a concerning 14%, intermodal shipments dropped 5%, and merchandise freight dropped 2%.
While insufficient staffing levels contributed in part to the drop in volume, operations actually improved during the third quarter as Norfolk claims to have reached its hiring goals ahead of schedule. The railway now maintains its biggest workforce since last summer, with 950 new conductors still in training.
Another factor that dragged down volume in Q3 was a looming labor agreement between U.S. railroads and 12 unions. Fearing a possible strike, some of Norfolk's customers diverted loads from rail to highway to avoid stuck shipments. So far, six of the unions have ratified the deal, but if all 12 unions don't come to an agreement, some investors fear negotiations could turn sour and result in an industrywide strike.
Looking ahead
Despite headwinds, Norfolk Southern's Q3 earnings results blew past estimates and set new company records for revenue, net income, and earnings per share (EPS). Revenue jumped 17%, net income popped 27%, and EPS saw a nearly 34% increase. In Q3, operating income also saw an impressive 12% rise.
Average train speed increased to 19.1 mph during Q3, and the amount of downtime trains spent at terminals decreased, marking an improvement in operations. Despite a slowing economy, CEO Alan Shaw remains confident and optimistic that the railway's continued improvements will drive future growth.
As Norfolk Southern continues to replenish its crews and optimize operations, watch for its stock to recover. If this locomotive operator can stay on its current trajectory, this railroad stock could be one to get bullish about.
