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Norfolk Southern’s Earnings Growth Rate Likely to Slow Down in Q1

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Updated

First-quarter expectations

Norfolk Southern (NSC) plans to report its first-quarter results on April 24. The company has an impressive record of beating analysts’ earnings estimates. The US railroad company surpassed analysts’ consensus estimates in all of the preceding 13 quarters with an average positive surprise of 11.8%.

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Wall Street estimates suggest that Norfolk Southern could continue its upbeat performance in the first quarter. Nonetheless, the growth rate is anticipated to be drastically lower than the growth rates it registered in the last four quarters.

CSX registered over 30% earnings growth in all of the preceding four quarters. However, analysts’ prediction of adjusted EPS of $2.18 for the first quarter implies a rise of just ~13% YoY.

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Why lower earnings growth?

Analysts expect lower revenue growth to hurt Norfolk Southern’s earnings. Wall Street forecasts revenues to increase by 3.9% YoY to $2.82 billion. The US railroad company registered high-single-digit revenue growth in the last three quarters.

Dismal rail traffic volumes are the main reason behind analysts’ sluggish top-line growth predictions. On April 3, Norfolk Southern reported flat traffic growth for the first quarter. Carload traffic witnessed a 1.9% decline, while intermodal volumes rose 2.2% in the quarter.

However, analysts believe higher pricing and benefits from cost-cutting initiatives to support Norfolk Southern’s first-quarter earnings growth. Notably, under its cost-cutting plan announced in 2016, the company intends to save $650 million in annual costs by 2020. The initiative helped the railroad improve its operating ratio (operating expenses as a percentage of revenues) by 270 basis points to 65.4% in 2018. The lower the rate, the better for the company.

Further, analysts expect Norfolk Southern’s continuous share repurchase programs to bring down the number of outstanding shares to ~271 million from ~286 million in the same quarter the previous year.

Peers’ performance

The majority of Class I railroad companies (IYT) have reported their first-quarter results. CSX (CSX), Kansas City Southern (KSU), and Union Pacific (UNP) posted YoY growth of 31%, 18%, and 15% in their respective first-quarter EPS.

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