Norfolk Southern Corp. (NSC), one of the leading U.S. railroad companies reported first quarter adjusted earnings of $1.13 per share that surpassed the Zacks Consensus Estimate by a penny and rose 25.6% from 90 cents in the year-ago quarter. The year-over-year growth was driven by higher revenue, particularly from general merchandise and intermodal that compensated for the subdued Coal results.

Adjusted earnings for the quarter excluded the impacts of $58 million (or 10 cents) related to non-cash charges.

Total operating revenue climbed 7.8% year over year to $2.8 billion, which was in line with the Zacks Consensus Estimate. On a year-over-year basis, Coal, General Merchandise and Intermodal revenues grew 6.1%, 13.4% and 8.7%, respectively. The year-over-year growth was buoyed by strong shipments along with higher revenue per unit thanks to growth in freight rates and fuel reimbursements.

In the first quarter, operating income was $745 million, up 24.2% on 500 basis points (bps) improvement in operating ratio (defined as operating expenses as a percentage of revenue) to 73.3%. Fuel expenses for the quarter increased 6.2%.

Cash Position

Norfolk exited the quarter with cash and cash equivalents of $ 829 million compared with $276million at the year-end 2011. Cash from operations increased to $1,035 million compared with $652 million in the same period a year ago.

Our Analysis

We remain encouraged by the company’s all time financial records in last year including revenues, operating income, net income, and earnings per share. Consequently, we expect 2012 to bode well for the company’s financials as management remains committed to enhance services, maintain railroad safety and network efficiency, and thereby improve cost and productivity. We believe strong pricing trend continued to aid volume growth and heavy investments in key projects that will remain major growth drivers.

We expect these growth factors to substantially compensate for headwinds such as increased headcounts, rising locomotive material cost and fuel prices, tightened railroad regulation, market uncertainties and competitive pressure from other leading railroads such as Union Pacific Corporation (UNP) and CSX Corp. (CSX) that will likely limit the upside potential over the near term.

We are currently maintaining our long-term Neutral rating on the stock. For the short term (1-3 months), the stock retains a Zacks # 3 Rank (Hold).

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