Coal's Long Shadow, Norfolk Southern's 4Q16 Results

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Part 6
Coal's Long Shadow, Norfolk Southern's 4Q16 Results PART 6 OF 7

NSC’s Operating Margins in 4Q16: Why the Elevated Track?

NSC’s operating margins

Norfolk Southern (NSC) reported quarterly operating expenses of $1.7 billion in 4Q16, which was 7.8% lower on a YoY (year-over-year) basis. However, revenues for the same period fell 1.1%. Thus, the higher incremental decline in operating expenses improved its operating margins.

The company’s reported operating margins were 30.6% in 4Q16, as compared to 25.5% in the corresponding quarter of 2015. But investors should note that 4Q15 included a restructuring expense of $49.0 million, which helped improve 4Q16 margins by 2%.

NSC&#8217;s Operating Margins in 4Q16: Why the Elevated Track?

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Compensation and benefits

NSC’s compensation and benefits expenses fell $40 million, or by 5.7%, in 4Q16, primarily due to reduced headcount, lower overtime, and lower re-crew expenses of $47 million.

NSC’s pension expenses also fell $10 million, but this fall was offset by higher bonuses of $21 million, wage inflation of $16 million, and a health and welfare rate rise of $12 million.

Purchased services and fuel

Purchased services and rents fell $41 million, or by 9.3%, in 4Q16. Reduced locomotive and engineering material usage along with lower travel cost resulted in an overall decline in purchased services.

Fuel charges remained unchanged at $194 million in the 4Q16, as compared to previous levels. But improvements in fuel efficiency were offset by an 8% rise in diesel prices in 4Q16.

Management outlook

For 2017, NSC expects headcount to remain flat, unaffected by the rise in volumes. However, higher welfare and health rates will most likely increase compensation costs by $65 million in 2017. The company anticipates 5% wage and medical cost inflation in 2017, as compared to 3.5% realized in 2016.

The operating margins of Eastern US railroads (XLI) such as NSC and CSX (CSX) have historically been lower. But Canadian major freight rails Canadian National (CNI) and Canadian Pacific (CP) have enjoyed higher operating margins. This has been mainly due to the higher long-haul routes of these railroads, as compared with Eastern US railroads.

In the next and final part, we’ll go through the Wall Street analyst recommendations for NSC and its peers.


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