After the closing bell on October 27, Norfolk Southern Corp. (NSC), the leading U.S. railroad company, reported its adjusted third quarter earnings of $1.19 per share, beating the Zacks Consensus Estimate by 10 cents. Earnings per share shot up 47% year over year from 81 cents in the year-ago quarter. Earnings were driven by higher prices, cost control and strong shipments.

Total revenue improved 19% year over year to $2.456 billion, owing to higher traffic volume (up 15%) as a result of a surge in demand for coal. However, total revenue narrowly missed the Zacks Consensus Estimate of $2.487 billion. Norfolk enjoyed increases of 16% in General Merchandise revenues, 24% in Coal revenues and 19% in Intermodal revenues.

Despite Norfolk’s efforts to control costs, operating expenses increased 14% year over year driven by higher compensation and benefit expenses as well as higher fuel costs. Operating ratio improved 320 basis points to 69.6% from 72.8% in the year-ago quarter.

Cash Position

Norfolk had cash and cash equivalents, including short-term investments of $1.4 billion in the reportable quarter compared with $1.1 billion in the previous quarter.

Dividend

On December 10, Norfolk is expected to pay a quarterly dividend of 36 cents per share to shareholders of the record on November 5.

Our Analysis

Going forward, the economy is expected to continue to grow albeit at a slower rate.  We believe Norfolk is well positioned to take advantage of the reviving economy in the near term as volume continues to grow across most of the business segments. The company is hiring back the employees it had furloughed during the recession, thereby allowing it to keep the cost low.

We remain bullish on the company’s long-term fundamentals and growth prospects attributable to its continued investments in key projects and new business opportunities. In addition, Norfolk remains committed to shareholders in the form of dividend and share buybacks. However, we remain cautious on forest products and expect intense competition, unionized workforce as well as increased railroad regulation to pressure the stock in the near term.

Based on improving tends and fundamentals, Norfolk retains its Buy recommendation with Zacks #2 Rank for the short term (1-3 months). However, we are currently reiterating our long-term Neutral recommendation on Norfolk Southern.

 
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