On Wednesday, Norfolk Southern (NSC) stock fell nearly 6% after its second-quarter earnings missed the estimates. The company reported an EPS of $2.70, which fell short of analysts’ estimates of $2.79. Norfolk Southern’s bottom-line growth rate slowed down to 8% YoY (year-over-year) in the second quarter.
The second-quarter earnings growth rate is much lower than the approximate 30% increase Norfolk Southern registered in the first quarter. The earnings growth rate is also significantly lower than over 30% YoY growth in all four quarters in 2018.
What hurt Norfolk Southern’s earnings?
Norfolk Southern’s dismal bottom-line results were mainly due to sluggish top-line growth. The company’s second-quarter revenues grew 1% YoY to $2.93 billion from $2.90 billion in the second quarter of 2018. The quarterly revenues also fell short of analysts’ expectations of $2.95 billion.
Norfolk Southern’s second-quarter revenue growth is much lower than the 4.5% increase it registered in the first quarter. The YoY increase in the top line is also in contrast to its high-single-digit growth in all of the quarters in 2018.
The dismal top-line performance YoY was mainly due to a 4% fall in the overall volume. However, the decline was more than offset by a 5% rise in the average revenue per unit. On July 3, Norfolk Southern reported a 3.5% YoY decline in its second-quarter carload traffic, while intermodal volumes fell 4%.
The global trade slowdown contributed to lower rail traffic volumes during the quarter. For the US, the ongoing trade disputes with China and European countries led to a slowdown in global trade. Also, floods across several North American regions had a negative impact on rail traffic during the second quarter.
Norfolk Southern’s operating ratio improved
Despite sluggish top-line growth, Norfolk Southern’s bottom-line results benefited from cost-saving initiatives. For the last few quarters, the company focused on lowering operating expenses by running fewer but longer trains, shedding unproductive assets, and reducing employee counts.
The initiatives helped Norfolk Southern lower its second-quarter operating expenses and improve the operating ratio. The company reported operating expenses of $1.86 billion for the second quarter, which is $12 million lower than the second quarter of 2018. As a result, the operating ratio improved by 100 basis points YoY to 63.6% in the second quarter.
Lower volumes hurt peers too
Overall, US railroad companies’ rail traffic volumes fell 4.3% in the second quarter, according to data compiled by the Association of American Railroads. As a result, major US railroads have reported a YoY decline in their respective revenues. On July 17, CSX (CSX) recorded a 1% fall in its second-quarter revenues due to a 4% decline in its freight traffic. Union Pacific’s (UNP) second-quarter revenues fell 2% YoY due to 2% lower volumes. The company reported its second-quarter results on July 18.
Kansas City Southern (KSU) reported its second-quarter results on July 19. The company’s second-quarter rail traffic volume of 569,900 railcars was marginally lower than 572,200 railcars. However, a 4% increase in the revenue per carload drove the company’s top line 4.6% higher.
With YTD (year-to-date) gain of 31.5%, Norfolk Southern stock has outperformed the broader market and the iShares Transportation Average ETF (IYT). The Dow Jones and the S&P 500 indexes have risen 16.9% and 19.9%, respectively, YTD. IYT, which tracks the performances of Dow Jones transportation stock, has gained 16.8%.