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2018 Is ‘Promising,’ Says Norfolk Southern, Ups Stock Buyback

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Norfolk Southern’s 1Q18 earnings

Eastern United States rail freight giant Norfolk Southern (NSC) announced its Q1 2018 earnings today. The railroad’s adjusted EPS (earnings per share) of $1.93 surpassed Thomson Reuters-surveyed analysts’ estimate of $1.77 by 9%. On a YoY (year-over-year) basis, NSC’s adjusted EPS was up 30%, compared with $1.48 in 1Q17.

After the 1Q17 earnings announcement, Norfolk Southern’s stock ran on an elevated track. The stock opened on $140.77 today, up 4.3% from the close of $134.97 on April 24. In the early trading hours, NSC stock was up 6.3%, trading at $143.50. The momentum in NSC’s stock is mostly fueled by CEO James Squires’s decision to raise the annual stock buyback to $1.5 billion.

In general, the “tax deduction of capital expenditure in the year incurred” clause of the Tax Cuts and Jobs Act is pushing transportation (XTN) companies’ earnings up. This impact has favorably affected these stock prices recently—railroads especially.

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NSC’s 1Q18 operating stats

Norfolk Southern’s railway operating revenues were $2.7 billion in 1Q18, up 6%, compared with $2.5 billion in 1Q17. The revenues rose primarily on a 3% rise in total railcar traffic, including intermodal.

Merchandise revenues account for the highest share of NSC’s total revenues. These revenues were up 1% to $1.6 billion on 2% lower volumes. Coal revenues jumped 3% to $434.0 million on a 4% decline in volumes. Intermodal revenues rose by a robust 19%, largely driven by an 8% volume rise and 10% growth in revenue per unit.

Norfolk Southern improved its operating margin by 130 basis points to 30.7% in 1Q18 from 29.4% in the corresponding quarter last year. Operating income jumped 10% YoY to $835.0 million in 2018, driven by productivity measures offsetting higher fuel prices and increased costs due to lower network velocity.

2018, an intermodal growth story

Norfolk Southern’s overall volumes were pushed up by strong intermodal volumes in 1Q18. However, the total carloads growth was negatively offset by lower coal and merchandise shipments. With the Trump government’s favorable outlook toward conventional energy, it appears that coal gave railroads a thumbs-up. However, coal volumes haven’t picked up well in 2018. Merchandise volumes mainly rely on industrial production in North America, which has exhibited a mixed trend.

A comprehensive comparison of 1Q18 rail freight data revealed that CSX (CSX) and Genesee & Wyoming (GWR) witnessed a negative change in overall volumes. Other Class I railroads (UNP), including Norfolk Southern, showed positive YoY total carloads growth in the quarter.

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