Norfolk Southern Reports Mixed 2Q

Norfolk Southern Corp. ( NSC - Analyst Report ) , one of the leading U.S. railroad companies reported second quarter 2012 earnings of $1.60 per share that surpassed the Zacks Consensus Estimate of $1.53 and rose 15.9% from $1.38 adjusted earnings in the year-ago quarter. Despite the looming economic outlook and softness in coal demand, the company’s earnings were driven by strong operating performance and cost control measures.

Total operating revenue remained flat year over year at $2,874 million but came in below the Zacks Consensus Estimate of $2,939 million.

On a year-over-year basis, Coal revenues declined 15.5% while General Merchandise and Intermodal revenues grew 8.6% and 4.3%, respectively.

In the second quarter, operating income was $934 million, up 6.7% year over year. Operating ratio improved 200 basis points to a record high 67.5%. Fuel expenses dropped 5.3% year over year.

Cash Position

Norfolk exited the quarter with cash and cash equivalents of $356 million compared with $276million at year-end 2011. Cash from operations was $1,663 million compared with $1,700 million in the year-ago quarter. Debt- to-equity ratio stood at 81.5% as of June 30, 2012 compared with 74.6% as of December 2011.

The company repurchased 12.3 million shares worth $850 million in the first six months of 2012 compared with 11.6 million shares worth $792 million bought back in the comparable year-ago period.

Our Analysis

We remain encouraged by the company’s commitment to improve its operating results backed by increasing service abilities, railroad safety and network efficiency that led to improve cost and productivity. Further, heavy investments in key projects are also expected to remain accretive to the company’s long-term growth.

However, we remain concerned about factors such as the prevailing market condition in the core segment like Coal and uncertainties regarding the present economic environment that may affect shipments. Further, tightened railroad regulation and competitive pressure from other leading railroads such as Union Pacific Corporation ( UNP - Analyst Report ) and CSX Corp. ( CSX - Analyst Report ) also remain significant headwinds for the company’s growth.

We are currently maintaining our long-term Neutral rating on the stock. For the short term (1–3 months), the stock retains a Zacks # 2 Rank (Buy).