Norfolk Southern's Northbound Numbers
While railroads companies at large have been charging ahead with record quarterly numbers, Norfolk Southern (NYS: NSC) wasn't one to be left behind. The U.S. railroad giant surprised the Street with a 42% jump in its second-quarter bottom line, buoyed by higher segmental revenues.
With numbers reaching record quarterly highs for the company, should investors get excited for the second half? We need to delve deeper to judge that.
With every segment clocking double-digit revenue growth, Norfolk's bottom line jumped 18% to $2.9 billion. Coal and intermodal led with 28% and 20% year-on-year jump in revenues, respectively, as volumes grew. Pricing and fuel surcharge gains also contributed significantly to the revenue growth.
In spite of higher operating expenses, particularly fuel prices, which shot up 60% from last year, Norfolk's operating income jumped to $875 million from $733 million a year earlier, as higher revenue helped offset costs. This is indeed a positive sign for a company that has been hit by input inflation.
Norfolk's bottom line surged from $392 million in the year-ago quarter to $557 million. Even if we exclude a one-time tax-related benefit of $63 million, the profit is still much higher from last year, which is commendable.
Norfolk repurchased $449 million worth of shares in the second quarter. For the second time this year, it has raised the quarterly dividend by $0.03 to $0.43 per share. But with a strong operating cash flow of around $1 billion, and a growing unlevered FCF from $371.1 million to $435.9 million year over year, the additional dividend cost should not weigh heavily on Norfolk.
With a higher level of debt and lower equity on books as compared to the year-ago quarter, Norfolk's total debt-to-equity ratio has marginally risen from 63.4% to 65.7%. But with no visible cash crunch and an interest coverage ratio of 7.7 times, servicing debt obligations doesn't look like a concern for the company.
Rail-based transportation is growing, as indicated by the Association of American Railroads' latest report showing a 2.7% rise in carloads in the first half of this year.
Intermodal transportation, too, has been gaining ground, with traffic rising 4.6% in June compared to the same month last year. As economic recovery gains ground, these numbers may go up further, all of which is good news for Norfolk.
Like Norfolk, other players in the industry have also benefited from intermodal growth. Union Pacific's (NYS: UNP) second-quarter intermodal revenues were up 13%, while Canadian National Railway (NYS: CNI) reported a 14% rise in such revenue. For CSX (NYS: CSX) , intermodal contributes 35% to total volumes, and intermodal revenue increased 24% in the second quarter.
Higher intermodal investing could increasingly benefit Norfolk. Work in four of its intermodal terminals is in progress, and another one is expected to be under way soon. FedEx's (NYS: FDX) selection of Norfolk for its intermodal network adds further substance.
Also, Norfolk's continued focus on the coal industry is shown from the recent completion of $16 million of track work in eight days to facilitate the coal-mining industry in Pennsylvania. It also indicates the company's work efficiency.
The Foolish bottom line
Strong revenue growth in spite of challenges is a plus for Norfolk. With the transportation industry also seeing a turnaround, most industry players are expecting a strong year ahead.
At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of FedEx. Motley Fool newsletter services have recommended buying shares of Canadian National Railway and FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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