Tags: railroad | earnings | Norfolk Southern | CSX

Norfolk Sets Rail-Earnings Tone as Weak Traffic Squeezes Profit

Monday, 13 April 2015 05:00 PM

Norfolk Southern Corp. heralded a difficult season for railroad profits with preliminary first-quarter earnings that trailed analysts’ estimates after coal carloads and fuel surcharges dropped.

U.S. carriers posted no growth in carloads in the first three months of 2015, according to Association of American Railroads statistics. They felt the sting of utilities switching to cheaper natural gas from coal; slower growth in oil train traffic as crude prices fell; and a drag on container shipments amid worker slowdowns at U.S. West Coast ports.

Norfolk Southern tumbled in late trading Monday after saying preliminary earnings will decline about 15 percent to $1 share from a year earlier. Analysts expected the Norfolk, Virginia-based company to earn about $1.26 a share, according to estimates compiled by Bloomberg.

“It’s a pretty big miss,” said Lee Klaskow, a Bloomberg Intelligence analyst. “There will be an overhang until they begin to improve their execution.”

Norfolk Southern is the second-biggest railroad in the eastern U.S. Its announcement came more than two weeks ahead of its full release on April 29 and on the eve of results Tuesday from CSX Corp., the traditional leadoff carrier. Kansas City Southern is set to report on April 21, followed on April 23 by Union Pacific Corp., the largest U.S. railroad by sales.

Norfolk Southern said revenue was about $2.6 billion, a 5 percent decline from a year earlier. Analysts had predicted revenue of $2.67 billion.

Shares Drop

The shares slid 4.7 percent to $99.90 at 6:39 p.m. Monday in New York after plunging as much as 5.6 percent. Norfolk Southern fell 4.3 percent this year through the close in New York while the Standard & Poor’s 500 Index gained 1.6 percent.

The drop in diesel prices has hurt railroads’ revenue because of fuel surcharges they levy based on the cost of fuel. Norfolk Southern has taken an outsized hit on the fees because it ties them to West Texas Intermediate crude, whose decline has outstripped diesel’s.

Norfolk Southern’s “unique fuel surcharge headwind” may mean slower growth than at CSX, the largest railroad in the Eastern U.S., in 2015 and 2016, Benjamin Hartford, an analyst with Robert W. Baird & Co., said in a research note.

When WTI is less than $50 a barrel, Norfolk Southern receives no surcharges from customers, Klaskow said. The price averaged $48.57 during the quarter, according to data compiled by Bloomberg.

CSX Earnings

CSX also faces a decrease in coal shipments. Unlike Norfolk Southern, CSX ties its fuel surcharges to the price of diesel, which lessens that impact.

CSX probably will say first-quarter earnings rose to 44 cent a share, according to the average of analyst estimates compiled by Bloomberg. The analysts expect revenue to increase to $3.02 billion.

Lower-than-anticipated rail traffic had led most analysts to pare their profit expectations, with estimates for CSX dropping more than 3 cents since last month, according to data compiled by Bloomberg.

Kansas City Southern cut its 2015 revenue forecast to “low single-digit” growth last month from “mid single-digit” because of lower coal and oil traffic. The strong dollar also weighs on earnings for the railroad, which gets almost half of its sales from Mexico.

Analysts have cut their profit estimates for Union Pacific by more than 7 cents on average since last month.

Canadian railroads have seen little movement in analysts’ estimates. Canadian Pacific Railway Ltd. and Canadian National Railway Co. both benefited from cargo diverted to the Vancouver and Prince Rupert ports during the U.S. West Coast port slowdown and from a strong dollar, boosting their U.S. revenue when translated to Canadian dollars, Klaskow said.

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Norfolk Southern Corp. heralded a difficult season for railroad profits with preliminary first-quarter earnings that trailed analysts' estimates after coal carloads and fuel surcharges dropped.
railroad, earnings, Norfolk Southern, CSX
Monday, 13 April 2015 05:00 PM
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