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Norfolk Southern Corp. (NSC - Analyst Report), one of the leading U.S. railroad companies reported third quarter 2012 earnings of $1.24 per share that surpassed the Zacks Consensus Estimate of by a penny but deteriorated 27% from $1.59 adjusted earnings in the year-ago quarter. The year over year decline was due to lower Coal and General Merchandise carloads resulting from poor economic backdrop.

Total operating revenues were down 7% year over year at $2,693 million but came in below the Zacks Consensus Estimate of $2,910 million.

On a year-over-year basis, Coal and General Merchandise revenues declined 22% and 1%, respectively while Intermodal revenues grew 3% year over year.  

In the third quarter, operating income was $731 million, down 22% year over year. Operating expenses inched up 1% year over year to $2 billion resulting in an operating ratio of 72.9%, up 540 basis points.

Cash Position

Norfolk exited the quarter with cash and cash equivalents of $693 million compared with $276 million at year-end 2011. Cash from operations was $2,476 million compared with $2,764 million in the year-ago quarter.

The company repurchased 16.5 million shares worth $1.2 billion in the first nine months of 2012 compared with 23.8 million shares worth $1.6 billion bought back in the comparable year-ago period.

Dividend

The company’s Board of Directors approved a quarterly cash dividend of 50 cents to shareholders of record on November 2, payable on December 10.

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 would likely 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 currently have our long-term Underperform recommendation on the stock. For the short term (1–3 months), the stock retains a Zacks #5 Rank (Strong Sell).

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