Source: Norfolk Southern.

Railroad company Norfolk Southern (NYSE:NSC) has seen its shares ascend to record levels recently, as discussions about a merger between rival CSX (NASDAQ:CSX) and Canadian Pacific (NYSE:CP) have caused speculative investors to look at further possibilities for consolidation across the rail-transport industry. Yet even as potential merger and acquisition activity draws the attention of many investors, Norfolk Southern continues to work at building up its own fundamentals. This morning's third-quarter report showed the progress the railroad has made in driving growth and taking advantage of favorable conditions in the industry, but some investors will be disappointed that Norfolk Southern didn't make even bigger strides forward.

Record results fall short

Norfolk Southern continued to grow during the third quarter, with overall revenue climbing 7% to $3.02 billion. Net income came in at $559 million, up 16% from the year-ago level and producing earnings per share of $1.79 on a diluted basis. CEO Wick Moorman touted the three-month period as "another record-setting quarter" and cited unprecedented levels in those figures, as well as in operating income and operating ratio. Yet investors didn't see everything they wanted, as the consensus had been that Norfolk Southern would produce even more impressive growth, with sales of $3.07 billion and earnings per share of $1.83.

A look at the details of Norfolk Southern's various segments in part explains the railroad's inability to reach those lofty figures. On the upside, the company posted double-digit percentage revenue gains in the intermodal, chemicals, and metals and construction segments. Moreover, a 12% gain lifted automotive segment revenue above $250 million.

Source: Norfolk Southern.

However, the all-important coal segment could not keep up the pace, as revenue fell by 2% from the year-ago quarter and 7% sequentially from the second quarter. Weak global markets held back the amount of coal that producers could export outside the U.S., and a mild summer in many areas of the nation reduced demand from domestic electric utilities that use coal for power generation. Pricing remained stable on the coal front, but 2% lower volumes weighed on the segment.

A focus on the long run

Despite the short-term disappointment that some investors will feel, Norfolk Southern made further progress on cost controls and other long-term goals. Even though its overall shipping volumes rose, operating expenses climbed only 3% from the year-ago quarter. In particular, the railroad reduced its fuel costs for the quarter and also paid less in compensation and benefits to employees. That emphasis on squeezing more profit from every dollar of sales helped improve Norfolk Southern's operating ratio, which fell almost 3 percentage points to 67%.

Source: Norfolk Southern.

Norfolk Southern also still clearly believes in the upward path of its stock, as it moved forward with its share repurchase program. During the quarter, the company paid about $66 million to buy back somewhere between 600,000 and 800,000 shares, bringing its total spending year to date to $166 million for 1.7 million shares.

At this point, the merger discussions between Canadian Pacific and CSX have investors curious about the direction of the industry. Norfolk Southern has many similar attributes to CSX, including roughly the same market capitalization, a similar geographical focus on the eastern part of the U.S., and heavier reliance on coal than some of its peers. If Canadian Pacific moves forward with a deal with CSX, then Norfolk Southern could also find itself in play if other major industry names try to respond in kind. Moreover, if CSX keeps spurning Canadian Pacific's advances, then some Norfolk Southern shareholders might hope the Canadian railroad would aim a buyout at their company instead.

Norfolk Southern can expect takeover rumors to keep swirling across the industry. And even if growth didn't quite keep up with expectations this quarter, the railroad is still making smart long-term moves to boost its results well into the future.