Coming into Wednesday morning's first-quarter financial report, Norfolk Southern's (NYSE: NSC) early warning of weak earnings results had already dashed investors' hopes that a huge boost from falling fuel costs would finally propel the railroad back toward profit growth. For several quarters now, Norfolk Southern has been hurt by its extensive exposure to the flagging coal industry, and the challenges that some of its biggest customers face have continued to weigh on the railroad's results at the beginning of 2015. Now, investors want to know whether Norfolk Southern can overcome its difficulties and move its shares back in the right direction. Let's look more closely at exactly how Norfolk Southern fared during the quarter and whether better times will ever come for the railroad.
The latest on tough times at Norfolk Southern
Norfolk Southern's latest results were ugly by any standards, with top- and bottom-line results that failed to beat even lowered expectations among investors. Revenue fell 4.5% year over year to $2.57 billion, and net income plunged 16% to just $310 million. That translated to earnings of $1 per share, down from $1.17 a year ago and only matching what those following the stock had expected Norfolk Southern to earn in the wake of the company's warnings about its imminent shortfall.
Once again, coal was the biggest detractor to Norfolk Southern's results, with segment revenue plummeting 16% to $455 million. The company blamed poor exports and utility demand for a 7% drop in shipment volume. Yet unlike what investors have seen in past quarters, other portions of Norfolk Southern's business also looked weak. For instance, intermodal revenue fell 1%, even though volume grew by 5%. Similarly, general merchandise revenue declined by 2%, with declines in metals and construction, chemicals, and automotive outweighing modest gains from the agricultural category.
The reason for the disconnect between volume and revenue stemmed from the reduction in fuel-surcharge revenue. That decline ate into the $168 million in cost savings the railroad enjoyed as a result of lower fuel prices, and so even with reduced expenses, operating income fell 9% across the company.
Can Norfolk Southern recover?
CEO Wick Moorman's comments about Norfolk Southern's results didn't pull any punches, as the executive pointed not just to coal's weakness but also the impact of severe winter weather on performance figures such as network velocity. Nevertheless, Moorman said in a press release that "while market uncertainties remain, the resources that we are deploying are driving improved network performance, and we expect our service levels will be significantly higher in the second half."
Still, it was hard to see signs of that potential future success in the latest numbers. Norfolk Southern's efficiency ratio worsened by more than a percentage point to 76.4%, reflecting the impact of a bigger drop in revenue than the corresponding cost savings.
One area where Norfolk Southern did support investors was with stock repurchases. The railroad spent $415 million on this effort during the quarter, obtaining 3.9 million shares. Yet as large as that number is, Norfolk Southern has authorization to repurchase another 31.3 million shares between now and the end of 2017, and the railroad's buying pace during the quarter was only a little faster than what a constant-purchase buyback program would look like over that time frame.
Given that the railroad had pre-announced its expectations for weak results, Norfolk Southern shares didn't react too badly to the news, falling 1% in the first 15 minutes of trading following the announcement. Until the railroad can do a better job of diversifying its exposure beyond the coal industry to find more shipping volume from healthier industries, Norfolk Southern will likely have trouble avoiding similarly disappointing results in future quarters. For those who expected the decline in energy prices to bring on an explosive upward move in stock prices, disappearing fuel-surcharge revenue is proving to be a bigger problem than many anticipated, and that could hold Norfolk Southern back for a while.