NS 1Q25: ‘Improved OR, Earnings Growth, and Consistent Service’ (Updated with TD Cowen Commentary)

For first-quarter 2025, NS reported that revenue was $3.0 billion, income from railway operations was $1.1 billion, operating ratio was 6.7%, and diluted earnings per share were $3.31.

After adjusting the results to exclude the East Palestine, Ohio, derailment in 2023, first-quarter income from railway operations was $961 million, the operating ratio was 67.9%, and diluted earnings per share were $2.69.

Insurance recoveries related to the Eastern Ohio incident exceeded incremental costs in the quarter, according to NS.

For first-quarter 2025, NS posted:

• Railway operating revenues of $3.0 billion, down $11 million compared to the first quarter 2024.
  • Excluding the impact of fuel surcharge revenue, which was lower compared to the prior year, railway operating revenues were $2.8 billion, up $47 million, or 2%, compared to adjusted first quarter of 2024, on volume growth of 1%.

• Income from railway operations was $1.1 billion, an increase of $933 million, compared to first-quarter 2024.
  • Adjusting for the Eastern Ohio incident, income from railway operations was $961 million, up $57 million, or 6%, compared to adjusted first-quarter 2024.

• Operating ratio in the quarter was 61.7% compared to 92.9% in first-quarter 2024.
  • Adjusting for the Eastern Ohio incident, the operating ratio for the quarter was 67.9%. This represents 200 basis points of improvement from adjusted first quarter 2024 which was 69.9%.

• Diluted earnings per share were $3.31, up from $0.23 in first-quarter 2024.
  • Adjusting for the Eastern Ohio incident, diluted earnings per share were $2.69, up $0.20, or 8%, compared to adjusted first-quarter 2024.

“I’d like to thank our entire team of dedicated railroaders for their outstanding efforts to generate these results. Our service performance is increasing our customers’ confidence in Norfolk Southern and allowing us to gain share,” added George.

TD COWEN INSIGHT: REMAINING OPTIMISTIC AS COST REDUCTIONS STAY IN FOCUS

By Jason H. Seidl, Elliot Alper and Uday Khanapurkar

Norfolk Southern beat expectations in Q1 despite adverse impacts from severe storms. Costs remain the key focus of its 2025 plans, and reiterated guidance shows confidence in productivity improvements despite an increasingly uncertain macro. Pricing commentary was encouraging, given previous sentiment of pricing deceleration. Our PT of $263 remaions, intact, reiterate Hold.

NSC reported 1Q adjusted EPS of $2.69, beating our and the consensus estimate of $2.66. A slight top line miss was offset by a 50bps beat on OR as the railroad was able to overcome weather challenges in the quarter. NSC resumed share repurchases in 1Q, buying back $250 million in stock.

NSC struck a relatively positive tone on pricing, particularly on the merchandise side. 1Q merchandise RPU excluding fuel was +4% Y/Y, and management attested to growing opportunities arising out of an improved service offering. Share capture in the chemicals segment also generated a mix tailwind, which helped offset some headwinds in the railroad’s freight mix during the quarter. Intermodal pricing was +2% Y/Y, also encouraging amid a pressured TL market and is expected to hold steady through the year, albeit with little upside. We are encouraged by these results, especially given they can be linked to self-help service improvements at a time when broader macro offers little support.

NSC continues to make progress on its cost plans in 2025 despite a 120bp impact from storm-related costs in Q1. Overall, s declined 3.2% despite flat revenues, and we were encouraged to see management confident on continued progress despite increased macro uncertainty. $55 million in labor productivity was the primary driver in the improvement in iQ operating expenses. NSC sounded significantly more confident on its productivity vs. CSX, in our view, acknowledging that it is starting from a higher (worse OR) base of 170bps.

End markets face recession overhang, but management emphasized that this is not their base case expectation at this time. Self-help share gains are expected to continue in the chemicals and intermodal segment as NSC exploits service offering and East Coast shift levers. Coal faces headwinds as export prices remain suppressed with near-term softness forecasted. NSC is ~25% exposed to non-U.S. directly.

Guidance of 3% revenue growth and 150bps of OR improvement in 2025 was re-affirmed, barring any changes to macro conditions. We were encouraged to see management reiterate guidance, but we and consensus continue to model below the full-year targets, given increasingly uncertain carloadings picture. Tariff impacts and their ultimate effect on volumes are the largest risk to guidance, though we note that 75% of NSC’s business is domestic. As of now, NSC is not seeing any deterioration in core business trends and stayed cautiously optimistic on the call. Capex guidance of $2.2 billion was also reaffirmed.

We increase our 2024 EPS estimate to $12.80 from $12.65 and maintain our 2026 EPS estimate of $14.60. Continuing to use our 18x multiple and our unchanged 2026 estimate, our price target stays at $263. Reiterate Hold.

Investment Thesis: Norfolk Southern faced a tough 2023 with a major derailment (East Palestine) and tech outages that hit margins. Gradual recovery is anticipated over the coming three years as NSC plays catchup with Class I peers. NSC has invested heavily in improving safety and staffing for long-term growth and service metrics continue to improve. Forthcoming catalysts are [continued] service improvement, intermodal rebounding and an operational turnaround. Our base case assumptions: The economy eventually rebounds at a gradual pace, and the company continues to achieve low-single-digit pricing in excess of rail inflation.