NS Beats the Street Profits up 38%

Trains Magazine General Discussion
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Norfolk Southern profit jumps, beats street view

(Reuters circulated the following article on October 25.)

CHICAGO – Railroad company Norfolk Southern Corp. on Wednesday said quarterly net profit jumped 38 percent on record revenue and better margins, coming in well above market expectations.

In premarket electronic trading after the announcement, Norfolk Southern shares rose more than 2 percent.

The Norfolk, Virginia-based company reported third-quarter net income of $416 million, or $1.02 a share, compared with $301 million, or 73 cents a share, a year earlier.

Wall Street analysts on average had expected earnings of 82 cents a share, according to Reuters Estimates.

“We have consistently driven financial and operational performance to higher levels throughout each quarter this year,” said Norfolk Southern Chief Executive Wick Moorman in a statement.

Revenue at the railroad rose to $2.39 billion from $2.16 billion a year earlier, the company said.

Analysts had expected revenue of $2.63 billion on average, according to Reuters Estimates.

Revenue from hauling coal rose to $595 million from $546 million, while intermodal revenue increased to $515 million from $471 million a year earlier.

In premarket trading Norfolk Southern shares were up $1.20 at $50.00, compared with Tuesday’s closing price on the New York Stock Exchange of $48.80.

From BLET Page

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Just goes to show that the market is clueless on valuing railroads.

Only wish I’d bought a few more shares…

LC

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NS finished the day at 53.68, up 10% from yesterday’s close.

But why do you say that the market is clueless on valuing railroads? Earnings surprises happen in every market sector. All it really means is that the company is not doing a very good job of communicating with analysts.

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Norfolk Southern Net Income Increases 38 Percent

For third-quarter 2006:

  • Net income climbed 38 percent to $416 million, $1.02 per diluted share.
  • Railway operating revenues increased 11 percent to a record $2.4 billion.
  • Income from railway operations improved 35 percent to a record $715 million.
  • The railway operating ratio improved 5.4 percentage points to 70.1 percent.

NORFOLK, VA. – Norfolk Southern Corporation (NYSE: NSC) reported record third-quarter net income of $416 million, or $1.02 per diluted share, a 38 percent increase compared with $301 million, or $0.73 per diluted share, for the same period of 2005. Third-quarter income from railway operations increased 35 percent to a record $715 million.

”We have consistently driven financial and operational performance to higher levels throughout each quarter this year,” said Wick Moorman, Norfolk Southern’s CEO. “In the third quarter our performance enabled us to produce excellent results and set records for railway operating revenues, income from railway operations and net income, while also significantly improving our operating ratio.”

For the first nine months, net income set a record at $1.1 billion, or $2.62 per diluted share, an increase of 19 percent compared with $919 million, or $2.24 per diluted share, for the same period of 2005. Nine-month results for 2005 included a benefit of $96 million from the effects of Ohio tax legislation, which increased diluted earnings per share by $0.23. Excluding this item, net income for the first nine months of 2006 would have been 33 percent higher than the $823 million, or $2.01 per diluted share, earned in the same period of 2005.

Record third-quarter railway operating revenues of $2.4 billion improved 11 percent compared with the same quarter a year earlier. For the first nine months, railway operating revenues increa

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Jim Cramer’s take:

"A 9% run in Norfolk Southern (NSC) shows that the market is at least momentarily over its obsession with the Fed, Jim Cramer said Wednesday on CNBC’s “Stop Trading!” segment.

Cramer said that back in May, when the Federal Open Market Committee last boosted its fed funds short-term interest rate target, earnings didn’t matter because “no one even wanted to listen” to companies. Cramer said investors missed out on an opportunity to buy stocks like the Norfolk, Va., railroad giant because they were focused purely on not fighting the Fed – an impulse that drove them away from cyclical stocks whose fortunes are closely linked to economic growth.

“We got so Fed-dependent,” Cramer said. “People didn’t care.”

But now, with the Fed having left rates unchanged for several meetings, earnings are getting a closer look. That’s why Norfolk’s good news is finally getting out, Cramer said…"

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As you can see it was the market, and not the NS that was clueless about how to value the railroad in this up market for railroads.

LC

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And if the Fed had raised rates again, NS stock would still be going nowhere. It isn’t about how well a company is doing right now, it’s all about future earnings potential. With rising rates, cyclical stocks whose fortunes are closely linked to economic growth are not very promising, regardless of current earnings.

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True, but the question is, have railroads either become less of a cyclical play as a result of the so called “Railroad Rennisance” which has resulted from the recent large increases in traffic driven by massive imports from the east, natural resource shipments and domestic energy needs (coal and ethanol)?

If, so, the market hasn’t figured that out yet, thus the large bounce in NSC today ( 10%) after great current earnings results. If the market had understood the “New” non-cyclical railroad play it would already have increased to a higher level resulting in a smaller bounce.

LC

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But you are making an assumption that railroads have become less cyclical - less tied to the economy because of the reasons that you stated. Yes, those things help them become somewhat less cyclical, but they are still very cyclical nonetheless. Even Mr. Cramer - whom you quote - calls them cyclical stocks. And it should be mentioned that NS has already warned that next quarter earnings are likely to be a disappointment.

Their bounce (which was quite a bit less than some other stocks) was the direct result of a positive earnings surprise at a time when investors no longer have expectations of continuing Fed rate increases.

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The market is clueless. It ran NS all the way up to $57 several months ago, then had it collapse back to $42 and now back to $53, all the while NS was just being NS - no disasters, no scandals, no meltdown. I think there are few on Wall Street who really understand what’s going on with RRs these days - and perhaps rightly so since there has never been a period where the RRs have been a mature industry operating in an relatively unregulated environment without an excess of capacity. However, it does appear that the market seems to lump all the RRs together - all are trading with 12 mo forward PEs of 13.5 - 15. Why CSX’s forward PE would be higher than UPs and BNSF’s lower than NS’s is a mystery to me.

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The market realizes that there are many factors that influence a railroad’s profitability. The Fed rate is one (railroads borrow heavily). The price of oil is another (diesel fuel isn’t free). If you think that the market is clueless for taking these types of factors into consideration, well then, the market is clueless.

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True, but a few months ago when he was touting RR stocks Cramer raised the same question of rails becoming non-cyclical as have many within the industry.

LC

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Up until last year when he received a promotion, Jim Valentine of Morgan Stanley was their analyst for the freight sector. Highly regarded by the instutional investment people, he had an excellent reputation for analysing all the factors moving railroad stocks.

I saw the presentation he made at the Northwestern Transportation Center last December and among many other items, he spoke of fuel cost, interest rates, demands for coal, truck competition matters and pricing strategies being employed with the current capacity situation. While I have not closely tracked the railroads against his forecasts, my sense is that he was very much on the mark for this year so far. Unfortunately, his promotion took him to London and with his change in responsibility, he can no longer provide analysis of the rail sector. He certainly was one “Wall Streeter” that had a lot of clues.

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He was good. And there is one other guy whose name escapes me, who had a clue. The rest are/were sheep.

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The other well regarded Railroad Analyst is Scott Flowers, currently with Bank of America Securities. I was listening to him ask questions on yesterdays CP 3Q announcement.

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Anthony Hatch has also been a longtime railroad analyst. He is independent now and in the past was with NatWest Securities before they merged…

LC