Railway operator Norfolk Southern (NSC 0.72%) enjoyed record revenue and operating income last year. But the company continues to face inflation, heightened fuel prices, wage increases, and declining volumes.
Let's take a closer look at Norfolk Southern's last quarter and full-year earnings results to determine if this railroad stock is a buy.
Q4 and yearly earnings records achieved
Operating revenue hit $3.2 billion, which was a fourth-quarter record. It also marked an impressive 13% year-over-year increase. Revenue per unit also increased 15%, partly due to a 28% surge in coal revenue during the quarter.
Fuel surcharges and core price improvements also contributed to Q4 gains, "more than offsetting a 1% decline in volume," as Chief Marketing Officer Ed Elkins described during last-month's earnings call. In another fourth-quarter record, income from railway operations climbed 5%, versus the same period in 2021, reaching $1.2 billion. Q4 net income rose 4% year over year.
The best Q4 merchandise gains were enjoyed in the sand and proppants markets used for oil and gas drilling. Corn and soybeans followed, "driven by exceptionally high demand," according to Elkins. Intermodal revenue saw a nearly 10% rise during the quarter.
Image Source: Norfolk Southern.
Norfolk Southern set yearly records, as well, in 2022, also for revenue and operating income. Compared to 2021, last-year's record $12.7 billion in revenue marked a 14% gain -- on an 18% jump in yearly revenue per unit. Also worth noting, an 8% rise in operating income was another annual record.
Expenses rose 19% year over year
While double-digit revenue growth is always nice to see, the Atlanta-based railway sustained a 19% rise in Q4 expenses year over year. Heightened fuel costs, increased claims, and higher employee compensation and benefits added to Norfolk Southern's expenses during the quarter.
Taking a look at the full-year 2022 performance, a slower network during the first three quarters restricted Norfolk Southern's ability to work at full capacity, and total volume declined by 3% annually. The intermodal segment was hit the hardest, "where a weakening truck market and supply chain congestion led to declines in annual volume," according to Elkins.
While CFO Mark George acknowledged that Norfolk Southern was "swimming against some pretty heavy headwinds" during the Q4 earnings call, he also highlighted tailwinds, like strong core pricing and ever-improving fuel efficiency.
Looking ahead
Norfolk Southern remains "cautiously optimistic amid uncertainty in the macroeconomic environment and some signals of a slowdown in activity," according to Elkins.
Keeping realistic, the company's 2023 outlook accounts for an unpredictable demand environment and continued inflation. During the Q4 earnings call, CEO Alan Shaw suggested that 2023's revenue performance would be level with 2022's, as Norfolk Southern will face pressure from lower volumes, "softening coal pricing," and reduced fuel surcharges.
On a positive note, Elkins described how "improving service levels will drive opportunities for modal conversion from trucks and increase our capacity to address unmet demand." He also recognized that "economic conditions could be a headwind to volume."
Is Norfolk Southern stock a buy right now?
According to Statista, revenue in the U.S. train industry is only expected to grow 1.7% by 2027. That's a stark annual growth rate of only 0.4% over the next four years. Some even claim freight rail stocks aren't the safe haven investments they once were.
As of now, my opinion is to hold off on taking a position in Norfolk Southern stock. Such weak growth expectations for rail, combined with the current economic downturn, will likely lead to better buying opportunities.
Time will tell whether the company is underpromising in order to overdeliver or whether its flat outlook is realistic. For now, investors should pay attention to future earnings reports using volume growth or decline as an indicator.
Keep in mind that markets are inherently unpredictable -- and love a surprise. A forward-thinking investor must consider that if the overall economy as makes a swift recovery, railway stocks will likely follow suit. Railroad investors should consider building positions before such a recovery. In other words, don't wait too long and be like Warren Buffett: Buy when there's still some fear left in the market.
