uploads/2017/04/NSC-OpMar-1.png

Inside Norfolk Southern’s Efficiency Drive: Operating Margins Now

By

Updated

Analysts’ estimated operating margins

For the first quarter of 2017, the analysts surveyed by Reuters have estimated a 29.3% operating margin for Norfolk Southern (NSC). We should note that in the same quarter of 2016, NSC recorded an operating margin of 29.6%. This indicates a slight deterioration in operating margins, though for fiscal 2017, analysts estimate relatively better margins on a YoY (year-over-year) basis.

Article continues below advertisement

Management insights

Before reviewing the analysts’ take on NSC’s operating margins in 2017, let’s go through the management’s insights. According to its “Target 2020,” NSC aims to achieve an operating margin of more than 35%. In its “Plan 2020,” the company stated that it aims to achieve cost reductions of $650.0 million by the end of 2020. But the company already achieved $250.0 million of that in cost savings in 2016. For the current year, NSC has guided to achieve cost savings of $100.0 million.

Norfolk Southern anticipates a flat headcount in 2017, and the current year brings with it the hope of increased volumes. In this case, NSC’s inflation and volume-related operating expenses could go up in 2017. On the fuel front, the company aims to curtail fuel costs through the use of Leader and Trip Optimizer technologies.

Market Realist feels that the targeted cost-squeezing may result in service disruptions and could prove difficult to attain. Further, the target seems to be far lower than the savings the company attained in 2016. Here, the management’s methodology to achieve cost reductions seems questionable.

Peer group projected margins

The major reason for the analysts’ forecast of a reduced operating margin for Norfolk Southern appears to be increased volumes. But coal volumes were considerably higher than they were in 1Q16. Below is a rundown of the analysts’ views of NSC’s peer group operating margins in 1Q17:

  • With the layoff of 1,000 managerial level staff, CSX is expected to achieve 28%, as compared to 26.9% in 1Q16.
  • Union Pacific’s (UNP) operating margin is expected to remain flat at 34.8%.
  • Canadian Pacific’s (CP) margin is expected to drop to 39.1% from 41% in 1Q16—mostly due to the exit of Hunter Harrison.
  • Canadian National’s (CNI) operating margin is expected to reach 40.2%, which is just down from 41.1% in 1Q16. This could be largely associated with relatively higher operating expenses resulting from incremental volumes in 1Q17.

Notably, all major railroads in the United States make up 5% of the portfolio holdings of the First Trust Industrials/Producer Durables AlphaDEX ETF (FXR).

Now let’s go through the analysts’ earnings estimates for Norfolk Southern in 1Q17 and fiscal 2017.

Advertisement

More From Market Realist