Given the continued stellar performance by Norfolk Southern Corp. (NSC) over the first three quarters of fiscal 2011, we maintain our Outperform recommendation on the company.
NSC’s all-time best operating ratio performance in the third quarter amid soaring fuel prices and economic uncertainty is encouraging. Norfolk’s earnings as well as revenues surpassed the Zacks Consensus Estimates and grew year over year on favorable pricing and modest volume growth across all segments in the last quarter, and we expect the trend to continue in the upcoming fiscal year.
We are also optimistic on management’s projection of volumes above GDP levels and pricing above cost inflation. Moreover, the company’s pricing improvements together with productivity gains to offset cost inflation are expected to prolong margin improvement and earnings growth in FY11 and beyond. Accordingly, Norfolk remains confident of delivering its mid 40s operating margin target for fiscal 2011.
We expect the on-going turmoil in the truck freight business, which is aiding demand growth in rail freight, and healthy global demand for export coal to remain the key growth drivers in the near term. Furthermore, business expansion with new Intermodal corridor initiatives and the collaborative venture with FedEx Corp. (FDX) will also aid revenues over the long term.
Norfolk initiated adequate cost control measures that bode well for growth targets. The company remains cautious about rising fuel prices and its adverse impacts on the cost structure. As a result, Norfolk is replacing its older and less fuel-efficient locomotives with new ones. We expect the new fuel-efficient locomotives to reduce average fleet age and result in lower maintenance expenses, driving further cost improvement. Going forward, Norfolk remains keen on hiring plans to improve service capabilities throughout its network and support demand growth.
Thus, we reaffirm our long-term Outperform recommendation on Norfolk Southern, supported by a Zacks #2 (Buy) Rank.
