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NoRthfolk southern

“NS blew away our and consensus EPS estimates as the company’s operating ratio improved more than 600 basis points to a 1Q16 record of 70.1%,” noted Jason Seidl. “After CP’s attempt at an acquisition, NS has kicked its cost-cutting initiatives into high gear. NS has been streamlining operations and adjusting to not only a soft freight environment, but also toward a structurally better OR longer term. NS’s 1Q16 EPS of $1.29 blew away our above-consensus estimate of $0.99 driven by an OR that was 520 basis points better than our forecast. Despite revenue falling 6% year-over-year, the company grew operating profit by 19% and EPS by 29%. Share repurchases, a lack of weather-related costs, moreefficient handling of freight cars, 12% fewer locomotives and nearly 2,000 fewer employees were key reasons for the big earnings beat. The top line will continue to be a headwind as coal stockpiles are at 100 days (vs. a normalized 60) and intermodal competition from truckload carriers is unlikely to abate for another couple of quarters. Intermodal pricing gains are being restrained by a loose truckload market. Management also expects the auto business to slow on a year-over-year basis as well, something we’ve already heard from rival railroads and have modeled into our estimates.” Seidl pointed out that NS is making more-aggressive changes than other Class I’s. “NS echoed themes similar to its peers,” he said. “Headcount reductions, stored locomotives, coal stockpiles, more favorable weather and better service have aided 1Q16 margins. However, NS has taken its productivity initiatives to another level. The company is now on pace for an additional $70 million of savings, or $200 million in total. That’s up 54% from prior guidance of $130 million. NS still expects to achieve $650 million in annual savings and a sub-65 OR by 2020. If management can keep posting results like 1Q16, it may have many people believing that will happen sooner rather than later. We think management’s guidance for a sub-70 OR in 2016 should be easily achievable, and we are now forecasting 68.1%—down from our prior estimate of 70.0%.” In his first annual report letter to shareholders since becoming CEO in 2015, Jim Squires wrote that the company “has taken decisive and deliberate action to capitalize on significant growth opportunities within our unique network.” He pointed to several cost control initiatives and network improvements, among them: • Closing the Roanoke, Va., office building and consolidating or relocating approximately 500 positions. • Restructuring the company’s Triple Crown Services subsidiary. • Reducing capital spending. • Expanding track rationalization in the coalfields. • Idling a major lake coal terminal. • Consolidating two operating divisions. While implementing these initiatives, NS “has maintained its commitment to providing superior customer service,” Squires said. “During this time, we achieved near all-time best service levels. In addition, we expanded our ability to 18

Railway Age

May 2016

serve markets in the Northeast by acquiring the Delaware & Hudson Railway Company’s line between Sunbury, Pa., and Schenectady, N.Y.” What happens next? Observes Contributing Editor Frank Wilner in this issue’s Watching Washington (p. 15): “Pershing Square’s effort to place Hunter Harrison in charge of a merged CP-NS was called off, but a non-railroad investment consortium—similar to Berkshire Hathaway—could emerge to take CSX or NS private without regulatory approval, and install Harrison or the Harrison template. Curse Hunter Harrison and one may as well curse steam power that replaced wind, or internal combustion engines that replaced steam. Harrison embodies the economic concept of creative destruction, a disruptor of the status quo substituting the more efficient for the less efficient—the free market’s messy means of delivering progress.” How much of a “mess” would have been created had circumstances been different and CP succeeded in capturing and corralling The Thoroughbred remains open to interpretation. Whether another attempt is made to form a transcontinental railroad, regardless of whether Norfolk Southern is part of that attempt, remains to be seen. RA

Steve Schmollinger

Beyond Expectations

May 2016 Railway Age  
May 2016 Railway Age