The Inside Track On Norfolk Southern's First-Quarter Results

Despite lower revenues and volume in the first quarter, some trends point to a stronger second quarter at Norfolk Southern.

Justin K Lacey
Justin K Lacey
Apr 30, 2014 at 5:45PM

One of North America's largest, publicly traded railroads, Norfolk Southern (NYSE:NSC), released first-quarter results last week. The market didn't like what it heard, pushing the share price down nearly 3% during the several days of trading. 

Compared to the same period a year earlier, revenue and volume declined 2% and 1% respectively. In addition, operating income declined over 3%, to $667 million, and earnings of $368 million, or $1.17 per diluted share, is an 18% decline from the $450 million, or $1.41 per share, from the first quarter of 2013. However, after adjusting for various one-time events, the quarter-over-quarter EPS decline was much more modest, and roughly in line with analysts' expectations which had been lowered due to the extreme winter conditions. 

Apart from the headline figures, here are three important takeaways from Norfolk Southern's latest earnings release and what it means for investors.

Revenue weakness driven by coal
The $49 million decline in revenues, from $2,738 million to $2,698 million was driven by fewer carloads, lower prices and an unfavorable mix toward lower yielding freight.

Like many of its peers, a significant reduction in coal volumes was to blame for lower freight revenues at Norfolk Southern. Coal carloads were down 13% for the quarter, compared to just a 1% decline in merchandise volumes and a 3% increase in intermodal. Revenue from coal has fallen quite dramatically over the past few years -- accounting for 25% of freight revenues in 2012, 22% in 2013, and just 20% in the recently completed quarter.

The good news for Norfolk Southern is that volumes are beginning to bounce back after an usually challenging winter. On a month to month basis, January was by far the most difficult period of the quarter, and volumes in all segments improved in February and March.

Source: Norfolk Southern

Operating ratio is up marginally
Every railroad strives to lower its operating ratio. A low operating ratio means more revenue flows to the bottom line as profit, and gives the company added flexibility to be competitive in terms of pricing. Norfolk Southern, however, has one of the highest operating ratios of all Tier 1 railroads.

Norfolk Southern's operating ratio was 75.2% for the quarter, a modest deterioration from the 74.8% achieved in the first quarter of 2013. However, as we have seen with many of its peers, Norfolk Southern benefited from a $40 million reduction in pension and medical expenses that kept the deterioration in its operating ratio from being worse.

Lots of cash
Norfolk Southern ended the first quarter with just over $1.5 billion in cash and cash equivalents, well above the $672 million from the year earlier quarter. Some capital spending was deferred during the most recent quarter due to weather, but given its strong cash position, investors should be optimistic about a potential dividend raise. At 2.2%, Norfolk Southern offers one of the best dividend yields among North America's Tier 1 railroads.

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Foolish bottom line
After an usually harsh winter that posed serious operational challenges to North America's railroads, it appears that momentum is beginning to return, and freight is moving more freely throughout Canada and the U.S.

The monthly improvements in volumes during the first quarter at Norfolk Southern is encouraging, and points toward a stronger second quarter. Despite its attractive valuation, with a forward price to earnings ratio of just 14.4, investors may want to evaluate Norfolk Southern's second quarter, free of the impacts of winter weather, before hoping aboard this train.