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Railway operating revenues of $2.9 billion increased 10% compared with second-quarter 2017, as overall volumes were up 6%, reflecting growth in all three major commodity categories of intermodal, merchandise and coal.
Railway operating expenses increased $107 million, or 6%, to $1.9 billion, compared with the same period last year, largely a result of higher fuel prices, higher incentive compensation, and increased costs associated with overall lower network velocity offset, in part, by refund claims for prior years’ employment taxes paid on equity awards.
Income from railway operations was $1.0 billion, an increase of 18% year-over-year, a record for any quarter. The railway operating ratio was 64.6%, a second-quarter record.
“Our second-quarter results reflect strong growth in our business and our sustained commitment to improving financial performance,” said James A. Squires, Norfolk Southern Chairman, President and CEO. “We are committed to delivering financial results that benefit our shareholders and service that benefits our customers.”
“A sub-65 operating ratio is likely achievable before the company’s initial 2020 timeline, and we are now modeling for a 64.9% OR next year,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “We expect solid volume growth and pricing momentum to continue in 2H18 and 2019, driven partly by conversion from the highway. We look for updated margin targets from the company and further leveraging of the balance sheet to unlock shareholder value.”
NS beat Cowen’s and and consensus estimates “top to bottom,” earning $2.50/share, compared to Cowen and Street EPS expectations of $2.32 and $2.33, respectively. “Excluding certain items, primarily a lower tax rate relative to our model, EPS was $2.42, still a decisive beat,” Seidl noted.
NS’s 10% revenue growth was just ahead of Cowen and consensus estimates, as was its 18% operating income to $1.03 billion, above Cowen and Street forecasts of $990 million and $982 million, respectively. The OR of 64.6% was 230 basis points better than 2017’s, 80 bps better than Cowen’s estimate, and 120 bps better than the Street. This represented the 10th consecutive quarter of year-over-year OR improvement.
“We are projecting this trend to continue in the remainder of 2018 and are now modeling for NS to reach its sub-65% OR target next year before management’s initial 2020 timeline,” Siedl said. “We expect NS to update its operational targets, including OR, in the coming months— possibly by early September. Given the company is tracking ahead on its previously announced plans, we would expect the new margin targets to represent a material improvement. Until then, management is likely to have to continue to deal with investors holding the company up to the strong OR standards CSX has set. Even so, we believe NS’s management team may be too measured and conservative in its commentary to offer the aggressive new goals that many investors appear to be craving. Hence, we expect that chorus of long-term margin goal questions from the investment community to continue.”
With pricing, “management again sounded decidedly upbeat, consistent with its commentary in the past three quarters,” Seidl noted. “While NS does not provide specific pricing metrics, it noted that pricing represents both an ‘emphasis and an opportunity.’ It indicated that pricing on truck-competitive business improved sequentially in the quarter as well as month-over-month. It also indicated that it recently signed some intermodal contracts (likely one year in nature) at very favorable pricing. Given these results and the current tight overall supply chain, we believe NS should not have a problem achieving increases comfortably in excess of rail inflation. We expect pricing to improve further as the freight recovery continues while freight capacity, especially in the truckload market, remains very tight.”
Cowen raised its 2018 and 2019 EPS estimates for NS to $9.10 and $10.15, from $8.80 and $9.80, respectively. “This is in order to reflect the 2Q18 beat, strengthening price outlook, subsiding network disruption costs, and continued strength in freight demand,” Seidl said. “Our price target rises to $188 from $181, based on our new 2019 EPS estimate and the same 18.5x multiple. We reiterate our Outperform rating.”
The post 2Q18 records for Norfolk Southern appeared first on Railway Age.
This article first appeared on www.railwayage.com
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