Norfolk Southern (NS) on Oct. 22 reported third-quarter 2024 financial results that reflected an adjusted operating ratio of 63.4%, excluding the “impact of railway line sales, the Eastern Ohio incident, as well as restructuring and other charges.” NS’s operating income was $1.1 billion for third-quarter 2024 and diluted earnings per share were $3.25. The Class I’s unadjusted operating ratio in third-quarter 2024 was 47.7% compared to 74.6% in third-quarter 2023.
During the third quarter 2024, the company closed two railway line sales resulting in cash proceeds of nearly $400 million and gains of $380 million. For the second consecutive quarter, insurance recoveries related to the Eastern Ohio incident exceeded incremental costs.
“The Norfolk Southern team continues to build momentum, producing strong results for our shareholders and customers, and delivering on our safety culture for our employees,” said NS President and CEO Mark R. George. “Working together, our team drove productivity and grew volumes while demonstrating resiliency in dealing with weather challenges. Thanks to our team’s hard work, we delivered sequential and year-over-year margin improvement putting us on track to achieve our adjusted operating ratio targets for the second half and full year 2024, and we are well positioned for long-term value creation.”
Third-quarter 2024 highlights:
- Railway operating revenues of $3.1 billion, up $80 million, or 3%, compared to third-quarter 2023.
- Income from railway operations was $1.6 billion, an increase of $840 million, or 111%, compared to the third quarter 2023.
- Adjusting for the impact of railway line sales, restructuring and other charges, and the Eastern Ohio incident, income from railway operations was $1.1 billion, up $198 million, or 22%, compared to adjusted third quarter 2023.
- Operating ratio in the quarter was 47.7% compared to 74.6% in third quarter 2023.
- On an adjusted basis, the operating ratio for third quarter 2024 was 63.4%. This represents 570 basis points of improvement from adjusted third quarter 2023 which was 69.1%.
- Diluted earnings per share were $4.85, an increase of 131% compared to third quarter 2023.
- Adjusted diluted earnings per share were $3.25, up $0.60, or 23%, compared to adjusted third quarter 2023.
The NS Investor Relations page provides more details.
TD Cowen: GETTING LEANER, MARGIN TARGETS ON TRACK
By Jason Seidl, Elliot Alper and Uday Khanapurkar
NSC came in above our forecast and consensus expectations in Q3 as management continues to park locomotives and take costs out of the network. There has been a challenged start to volume in Q4 with RPU (revenue per unit) headwinds in intermodal and coal, though management reaffirmed full-year margin guide despite ~$20MM of hurricane-related expenses. Sticking to LT guide suggests more opportunities for tightening the network in 2025.
NSC reported $3.25 adjusted. EPS in 3Q, above our forecast and consensus expectations of $3.11. Revenue growth of 3% was driven by 7% volume and partially offset by a 7% decline in RPU. Adjusted OR of 63.4% beat our forecast by 120bps. The 7% volume growth was led by coal and intermodal, though a challenging start to the quarter (due to hurricane impacts) will likely create an uphill battle to finish the year, and NSC likely won’t achieve its 1% revenue growth target previously given. NSC called out the ILA strike impacting international intermodal volumes in the quarter, though it expects a majority of the volume to be recovered in Q4.
RPU should continue to be pressured in Q4 driven primarily by coal and intermodal. We model coal RPU down HSD in Q4; seaborn pricing for met coal is declining though partially offset by increase in thermal exports. Despite a peak season that NSC believes will be strong, domestic intermodal pricing continues to sit around trough levels, and international volume growth should negatively affect the mix in 4Q, limiting upside for RPU in 4Q.
Costs were a large focus of the call, as a strong OR beat was driven by continued cost takeouts ($47MM of sequential improvement of expenses, led by fuel) which should continue into 4Q, despite a seasonal uptick in OR and ~$20MM of hurricane related expenses. The full year OR target of 66% (that we and investors previously thought was lofty in 1H24 amid activist pressure) appears achievable and may even have room for upside if volume recovers, fuel continues to be favorable and cost initiatives continue. Recall NSC signed a tentative labor agreement with 67% of employees earlier this week—5 years at 3.5% annual wage growth (same as CSX).
Locomotive productivity improved 18% in the quarter as NSC has stored more than 500 units and has taken 8,000+ cars offline since March, reducing operating costs and capex requirements (NSC expects capex to step down in FY 2025). Despite NSC thinning out its network, both terminal dwell and train speed improved in Q3 with volumes up 7% (acknowledging easy comparisons). Given the ~66% should do this year and management reaffirming its multiyear outlook of 100-150bps of OR improvement and ultimately a sub-60, NSC should have plenty of more wood to chop; management has discussed purchased services a primary lever for cost takeout and has improved as a percentage of revenue for three consecutive quarters.
We adjust our 2024 and 2025 EPS estimates to $11.83 from $11.90 and $13.60 from $13.65, respectively. We increase our multiple a half turn to 19x given improved operating performance. Using our updated 2025 EPS estimate, our price target moves to $259. Reiterate Hold.
