Bullish operating target
Norfolk Southern (NSC) shares rose more than 3% on February 11 after the company updated its long-term financial goals. There was a significant improvement in the company’s operating ratio. According to Norfolk Southern’s new strategic plan, the company intends to lower its operating ratio by 100 basis points to 64.4% in 2019 from 65.4% in 2018.
By 2021, Norfolk Southern wants to have an operating ratio of 60%. The ratio is a key industry metric for railroad companies. The operating ratio compares operating expenses to net sales. The lower the operating ratio, the better it is for the company.
At the Investor and Financial Analyst Conference on February 11, Norfolk Southern unveiled a detailed strategic plan. The company said that it will focus on improving productivity, efficiency, and revenue growth to attain the desired operating ratio.
During the event, James A. Squires, Norfolk Southern’s chairman, president, and CEO, hinted that implementing a PSR (precision scheduled railroading) system would be the key to achieve its targets. Squires said, “As we implement precision scheduled railroading, our initiatives are focused on five key principles: serving our customers, managing our assets, controlling our costs, working safely, and developing our people.”
The PSR principles help railroad companies (XLI) reduce network complexity and improve operational efficiency. The adoption of PSR principles has helped several railroad companies attain a better operating ratio. Canadian National Railway (CNI), Canadian Pacific Railway (CP), and CSX (CSX) adopted the system. The PSR system has helped the companies lower their operating ratio in the last few years.
In October, Norfolk Southern announced that it would adopt the system in order to provide better customer services at lower costs. Norfolk Southern’s announcement was one month after Union Pacific (UNP) said that it would also implement PSR principles. Both companies intend to match their operating costs with the industry and improve their margins.
Norfolk Southern’s long-term outlook also included revenue growth at a compound annual growth rate of 5% through 2021. The company plans for a capital expenditure of 16%–18% of its revenues through 2021 to improve safety, efficiency, and growth. Norfolk Southern plans to achieve a dividend payout ratio of 33% by 2021.