After the closing bell on Tuesday April 24, Norfolk Southern Corporation (NSC) released operational results for its first quarter of fiscal year 2012. The results came in above the Street's expectations on both the top and bottom lines. Volumes were 1.1% higher year over year, as increases in general merchandise and intermodal revenues more than offset the decline in coal revenues. NSC reported revenue of $2.79 billion, up 6.4% from $2.62 billion in the first quarter of 2011. On the bottom line, NSC reported earnings of $1.23 per share, above the Street's $1.15 per share estimate; three months ago, the Street's earnings per share estimates forecasted earnings of $1.22 per share. Click here to read my earnings preview for Norfolk Southern.
When valuing the rails, I monitor three metrics closely: volumes, pricing power, and operating ratio. For the quarter, volumes were up 1.1% year over year, but down 0.3% sequentially, with coal volumes being the main headwind, falling 11.6% year over year and 10.0% sequentially. Automotive and MetCon shipments were up 22.5% and 11.5%, respectively, compared to the first quarter of 2011. With respect to pricing power, the Company had its revenue per unit (RPU) increase 5.2% year over year and 4.1% sequentially. That is roughly inline with other rail companies in the industry. Operating ratio, which is computed as the total operating expenses as a percentage of revenue, improved to 73.3% from 77.1% year over year, but it increased from 71.4% sequentially. Every line item on the Company's income statement improved as a percentage of revenue year over year, including fuel. NSC's fuel costs increased 6.2% year over year to 14.8% of revenue (down from 14.9% year over year).
Management's expectations for the coming months seem a bit rosier than the other companies I follow, specifically in export coal. However, in terms of domestic coal, an extremely mild winter and increased competition from natural gas kept shipments weak during the first quarter, and that weakness is expected to continue through the second quarter. Economic data has come in a little bit weak over the past few weeks, however, the rails are considered an economic bellwether and volumes (save for coal) have remained strong. Looking through the second quarter, and into the second half of the year, I expect coal shipments to remain relatively weak, but for shipments of other products, specifically intermodal shipments, to more than make up for the coal shortfall. I still think there is room to the upside for shares of Norfolk Southern, but Union Pacific (UNP) is still my favorite in the industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
