Norfolk Beats, Dips Y/Y

Norfolk Southern Corp. (NSC - Analyst Report), one of the leading U.S. railroad companies, reported stellar fourth quarter and full-year 2012 results on the back of strong contributions from the chemicals, auto, and housing sectors. Trimming of costs along with higher productivity also enhanced the performance level.

Quarterly adjusted earnings of $1.30 per share surpassed the Zacks Consensus Estimate of $1.19 but deteriorated 8.5% from $1.42 adjusted earnings in the year-ago quarter.

Total operating revenues were down 4.0% year over year at $2,684 million but were ahead of the Zacks Consensus Estimate of $2,670 million. On a year-over-year basis, Coal revenues declined 22.7%, while General Merchandise and Intermodal revenues grew 3.6% and 5.4%.

In the fourth quarter, operating income was $714 million, down 10.8% year over year. Operating expenses dropped 1.4% year over year to $1,970 million, resulting in an operating ratio of 73.4%.

For the full year, the company posted earnings of $5.37 per share (surpassing our projection by 1.9% but deteriorating 1.5% year over year), on revenues of $11,040 million (down 1.2% from the prior year).

Cash Position

Norfolk exited 2012 with cash and cash equivalents of $653 million compared with $276 million at year-end 2011. The company had long-term debt (including current portion) of $8,482 million, representing debt-to-capitalization ratio of 46.5%.

Dividend

The company’s board of directors approved a quarterly cash dividend of 50 cents to shareholders of record on Feb 1, payable on Mar 11.

Other Railroad Stocks

Rail transportation service company Union Pacific Corporation (UNP - Analyst Report) will release its fourth-quarter 2012 financial results on Jan 24, 2013 before the opening bell. The Zacks Consensus Estimates for the fourth quarter and 2012 earnings currently stand at $2.16 per share and $8.25 per share, respectively. The estimates reflect a respective year-over-year growth of 8.7% and 22.7% for the fourth quarter and 2012.

Other stocks worth considering within the sector are Genesee & Wyoming Inc. (GWR - Snapshot Report) that holds a Zacks Rank #1 (Strong Buy) and American Railcar Industries (ARII - Snapshot Report) that carries a Zacks Rank #2 (Buy).

Our Analysis

Norfolk currently holds a Zacks Rank #3, implying a short-term Hold rating. We believe the company is poised to benefit from strong pricing momentum on the back of growing market demand and shortage in truckload transportation. We expect pricing improvements at Norfolk together with productivity gains to push the profitability level higher.

However, we remain concerned about factors such as the prevailing market condition in the core segment like Coal and uncertainties in the present economic environment that would likely affect shipments. Further, tightened railroad regulation and competitive pressure also remain significant headwinds for the company’s growth.