We are currently maintaining our long-term Neutral rating on the leading U.S. railroad company, Norfolk Southern Corp. (NSC). Currently, the stock has a Zacks #3 Rank (Hold).
We believe Norfolk’s investments in key projects, business volume expansion across its segments and a reviving economy bode well for the company. However, accelerated hiring, stricter railroad regulation, rising fuel prices, intense competition, and depressed revenues from forest products will likely limit the potential upside for the stock.
In the recently concluded fourth quarter of 2010, Norfolk earned $1.00 per share, missing the Zacks Consensus Estimate by a nickel but improving from 82 cents in the year-ago quarter. Revenue of $2,392 million also fell short of the Zacks Consensus Estimate but was up 14% year over year on higher traffic volume driven by increased demand for coal.
Despite Norfolk’s deep focus on cost control, its operating expenses increased nearly 14% year over year due to rising fuel prices. The company’s balance sheet remained healthy with cash and cash equivalents, including short-term investments of $1.11 billion.
Norfolk projected a positive outlook for 2011. It believes the recent hike in quarterly dividend to 40 cents per share from 36 cents signifies solid business growth across its network. The company also plans strategic long-term investments and anticipates $2.2 billion in capital expenditures for 2011. We believe these investment plans coupled with Norfolk’s commitment to shareholders through dividend and share buybacks pose a confident year ahead.
Further, Norfolk’s major Intermodal corridor initiatives (Heartland, Crescent, Meridian, and Titusville) are likely to accelerate its performance this year. The ongoing truckload business conversion from highway to rail is yet another business prospect for the company.
The company remains firm on improving its operating ratio through 2011. On the other hand, it also plans to increase its crew capacity to support the growing business volume. We believe the company’s hiring strategy holds good for the long run but will be a major cost headwind in 2011 followed by increasing locomotive and freight car material expenses.
We remain primarily concerned about the rising fuel prices that will depress margins in 2011. Stringent railroad regulation and competitive pressure from companies like CSX Corp. (CSX) are also near-term concerns. Further, future expenditure on business expansion could have a negative impact on liquidity, which will in turn keep the company’s free cash flow under pressure.
CSX CORP (CSX): Free Stock Analysis Report
NORFOLK SOUTHRN (NSC): Free Stock Analysis Report
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