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Norfolk Southern Will Miss Profit Target as Volumes Fall

Wednesday, 19 September 2012 06:03 PM

Norfolk Southern Corp., the second-biggest eastern U.S. railroad, said it will post a lower third-quarter profit than analysts estimated as volumes drop in some markets and fuel-surcharge revenue declines.

Earnings will range from $1.18 to $1.25 a share, the Norfolk, Virginia-based carrier said Wednesday in a statement. That compares with the average of $1.63 a share from analysts surveyed by Bloomberg.

Norfolk Southern’s revision is adding to signs that the U.S. economy is slowing and follows FedEx Corp.’s cut to its full-year profit forecast yesterday. UBS AG downgraded Norfolk Southern, CSX Corp. and Union Pacific Corp. from buy to neutral and Kansas City Southern to sell Tuesday, citing expectations of a weak harvest and lower coal shipments.

“The era of great railroad pricing is over, at least for most commodities in this economic environment,” Kevin Crissey, a New York-based analyst with UBS, said in a note to clients that explained the downgrades. “We expect more competitive pricing going forward.”

Decreases in coal carloads and merchandise shipments, eased by growth in container-car volumes, will reduce revenue by about $120 million from a year earlier, while fuel surcharges will be about $80 million less, Norfolk Southern said.

The company's stock sank 5.3 percent to $68.84 in aftermarket trading Wednesday, after falling 1.7 percent during regular trading. Norfolk Southern’s peers also slumped in late trading. Union Pacific Corp., the biggest U.S. railroad, fell 4 percent to $120 at 5:17 p.m. in New York, while CSX Corp. dropped 5 percent to $21.64. Kansas City Southern slid 2.7 percent to $77.

Share Performance

Norfolk Southern is the only company to decline this year on the three-company Standard & Poor’s 500 Railroads Index, with shares dropping less than 1 percent. Union Pacific gained 18 percent in the period, while CSX climbed 8.2 percent.

U.S. railroad profits have been crimped as a drought in the Midwest scorched crops and utilities began using cheaper natural gas for power generation rather than coal carried by rail. Companies from CSX to Warren Buffett’s Burlington Northern Santa Fe are now bracing for limited increases in pre-holiday shipments because of weak consumer sentiment.

Rail volumes traditionally start to peak in the last two weeks of August as shipments of consumer products bound for store shelves converge with the U.S. harvest and coal for utilities’ winter stockpiles.

The muted peak reinforces the shrinking growth signaled when economic bellwether FedEx lowered its forecast.

Contracting Economies

Contracting economies in the U.S. and Europe have triggered a slump in international trade growth over the past several months, contributing to a drag on shipping demand and hurting expansion in China, FedEx Chief Executive Officer Fred Smith said.

U.S. industrial production shrank in August by 1.2 percent, the most since March 2009, in part because unemployment higher than 8 percent reduced consumer spending, Federal Reserve figures released Sept. 14 indicate.

While railroad profit margins may continue to expand, “the rate of improvement will be much more modest than in the past,” UBS’s Crissey said.

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Norfolk Southern, the second-biggest eastern U.S. railroad, said it will post a lower third-quarter profit than analysts estimated as volumes drop in some markets and fuel-surcharge revenue declines.
Wednesday, 19 September 2012 06:03 PM
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