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Could Norfolk Southern Deliver on Operating Margins in 4Q17?

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NSC’s estimated 4Q17 margins

After discussing the 4Q17 revenue prospects of Norfolk Southern (NSC), we’ll turn to its operating margins. Analysts surveyed by Thomson Reuters expect the company to report an operating margin of 31.4% in 4Q17. Based on NSC’s operating margin of 30.6% in 4Q16, this represents an expected gain of 0.8%.

For 2018, analysts predict an operating margin of 32.7% for Norfolk Southern. This translates into an expansion of 0.5% over 2017’s operating margin of 32.5%.

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Management’s operating margin target

According to Norfolk Southern’s (NSC) Plan 2020, the company aims to attain an operating margin of at least 35% until 2020. The company’s Plan 2020 expects to realize cost curtailments of $650.0 million until the end of 2020. 

NSC has already derived cost savings of $250.0 million in 2016. For fiscal 2017, Norfolk Southern is hopeful of achieving cost reductions of ~$150.0 million.

Norfolk Southern anticipates a flat or slightly higher workforce in 2018. The company intends to hire and train T&E employees, keeping in mind that peak demand occurs in summer and fall of 2018. The current year could see the company idling more terminals and locomotives.

In the wake of increased fuel prices, we should expect Norfolk Southern to expedite its initiatives of higher train lengths and reduction in fuel consumption. On the fuel front, the company aims to curtail fuel costs through the use of LEADER and Trip Optimizer technologies.

Peer group’s projected margins

Fiscal 2018 should be more challenging for the railroads as far as maintaining or growing operating margins. This could be due to increased freight volumes, which require efficient handling. Efficient handling refers to handling more volumes with fewer crew members—the biggest challenge for Class I railroads. 

Following are the Thomson Reuters–surveyed analysts’ operating margin estimates of NSC’s peer group in 2018 versus 2017.

  • CSX (CSX) – 35.9% versus 32.5%
  • Union Pacific (UNP) – 38.4% versus 37.3%
  • Kansas City Southern (KSU) – 36.3% versus 35.5%
  • Canadian Pacific Railway (CP) – 42.2% versus 42.1%
  • Canadian National Railway (CNI) – 43.1% versus 43.2%

Investors interested in transportation stocks can opt for the First Trust Industrials/Producer Durables AlphaDEX ETF (FXR). All major trucking companies in the US make up 3.6% of FXR’s portfolio holdings.

In the next part, we’ll consider analysts’ 4Q17 earnings estimates for Norfolk Southern and its peers.

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