Norfolk Southern Corp. (NSC), one of the leading rail transportation companies, is slated to release its third quarter 2011 results on Tuesday, October 26, after the closing bell. The current Zacks Consensus Estimate for third quarter earnings per share is pegged at $1.42, representing an annualized growth of 18.98%.
Second Quarter Flashback
Norfolk’s second quarter financial results surpassed the Zacks Consensus Estimate and remained above the year-ago level on strong fuel price recovery and a tighter truckload market.
Revenue also came in ahead of the Zacks Consensus Estimate and grew 18% year over year to $2.9 billion, buoyed by higher revenue per unit and double-digit revenue growth across all segments.
Agreement of Estimate Revisions
Estimates for the third quarter have been following a downward trend over the last 7 and 30 days. Over the last 7 days, out of 22 analysts, one increased and 2 decreased their estimates. Over the last 30 days, only one analyst moved upward while 10 made downward revisions.
For fiscal 2011, out of 22 analysts, one made a positive revision in the last 7 days but 2 moved south. Over the last 30 days, three moved upward but eight made negative revisions.
For fiscal 2012, out of 25 analysts, none made a positive revision in the last 7 as well as in 30 days. But 4 and 12 analysts moved downward in the last 7 and 30 days, respectively.
We believe, similar to other railroads like CSX Corporation (CSX), Norfolk’s downward projections reflect the negative sentiment of the market on railroad stocks given lower coal demand. Factors like the estimated decline in coal shipment, particularly in export market, ongoing economic volatilities, and lack of balance in supply/demand dynamics remain primary contributors to downward revisions.
Magnitude of Estimate Revisions
For the third quarter, the Zacks Consensus Estimate remained static in the last 7 days but dropped a penny in the last 30 days to $1.42.
For fiscal 2011, the estimate was unchanged in the last 7 days but slipped a penny in the last 30 days to $1.32.
Earnings Surprises
With respect to earnings surprise, over the trailing four quarters, Norfolk outperformed the Zacks Consensus Estimate with the average being 4.10%.
The current Zacks Consensus Estimate for the ongoing quarter remains neutral but carries a 0.76% downside risk and 0.20% upside potential for fiscal 2011 and 2012, respectively .
Our Recommendation
Despite, the stellar performance in second quarter, upheld by an improvement in rail freight and pricing gains, our outlook on Norfolk remains subject to near-term headwinds such as lower coal demand projection and soaring fuel costs that could affect margins along with market uncertainties in housing as well as in chemical businesses.
Further, intense competition from other leading railroads such as Union Pacific Corporation (UNP) andCSX Corp. as well as regulatory issues surrounding the rail industry also contribute to our cautious stance on the company.
Consequently, we have a long-term Neutral recommendation on Norfolk Southern supported by Zacks #3 Rank (Hold).
