Norfolk Southern Stock Slips on Earnings Report

By Gregory Richards, The Virginian-Pilot, Norfolk, Va.

Jan. 25–NEW YORK — Shares in Norfolk Southern Corp. dropped nearly 6 percent Wednesday after the railroad’s fourth-quarter earnings came in a penny under expectations.

The Norfolk-based company reported Wednesday that its earnings rose 6 percent to $385 million, or 95 cents per share, in the October-to-December period. That’s up from $362 million, or 87 cents per share, in the same period a year earlier.

Norfolk Southern’s earnings growth came despite an economic slowdown that eroded volumes in every category save agricultural and its critical coal segment.

Wall Street analysts had expected earnings of 96 cents per share, according to the consensus reported by Thomson Financial. Norfolk Southern shares fell $3.12 each to close Wednesday at $50.61 on the New York Stock Exchange.

The economic slowdown toward the end of 2006 didn’t put much of a damper on the railroad’s full-year results, however, because of strong demand for rail shipping earlier last year. For all of 2006, Norfolk Southern said, it earned $1.48 billion, or $3.57 per share. That’s 2 cents below the $3.59 a share estimate of Wall Street analysts, according to Thomson, but up 16 percent from 2005. It earned $362 million, or 87 cents a share, in 2005, results that include a benefit of $96 million, or 23 cents a share, from the effects of Ohio tax legislation.

“Our financial results for 2006 demonstrated the sustained healthy demand for efficient freight transportation by rail,” said Wick Moorman, Norfolk Southern’s chairman and chief executive, to railroad stock analysts at a meeting in midtown Manhattan. “We continue to handle demands that were unimaginable only a few years ago and do so safely and efficiently, often in the face of considerable challenges.”

Independent railroad analyst Anthony B. Hatch waved off Norfolk Southern’s having missed Wall Street’s estimate.

“One penny doesn’t bother me,” Hatch said. “They slightly underperformed expectations, but it was a pretty solid quarter given the volume trouble they had.”

During the quarter, the railroad’s revenue rose 3 percent to $2.32 billion, compared to the same period in 2005. Most of that gain came from higher rates charged to customers as volume fell 3 percent from the same period last year to 1.9 million carloads.

Revenue for last year grew 10 percent to $9.41 billion as rail volume nudged up 1 percent to 7.9 million carloads.

Two of Norfolk Southern’s business segments — coal and general merchandise — saw fourth-quarter revenue growth compared to a year ago.

However, revenue in the third segment, intermodal, fell 5 percent as carloads fell three percent. Intermodal refers to shipments of international cargo containers and truck trailers.

Donald W. Seale, the railroad’s executive vice president and chief marketing officer, attributed that decline — the first since 2001 — to falling demand in the housing and automotive sectors. Also, trucking companies were able to carry more freight during the quarter, diverting some of it from the rails, he said.

Coal revenue jumped 13 percent during the quarter as carloads grew 4 percent. Despite warmer than usual temperatures that reduced demand for electricity produced by coal-fired power plants, Seale said the growth came partly from coal-burning facilities rebuilding stockpiles and from Western U.S. coal shipped to Eastern U.S. users.

General merchandise revenue grew 2 percent as the number of carloads dropped 6 percent. Agriculture shipments rose due to increased corn and ethanol shipments, Seale said, but volumes of automotive, chemicals, paper and metals and construction materials all fell.

Expenses for the quarter increased 3 percent to $1.7 billion, mainly due to increased compensation and benefits costs, said Henry C. Wolf, Norfolk Southern’s vice chairman and chief financial officer.

For the year, rising diesel fuel costs accounted for more than half of the railroad’s expense increase of $440 million. Its diesel fuel costs rose 34 percent, or $250 million, in 2006, reflecting higher prices, increased consumption and the end of a fuel-hedging program in the middle of 2006.

Moorman said Norfolk Southern’s performance last year shows the staying power of the “railroad renaissance” frequently mentioned by he and others in the railroad industry. The theory goes that higher fuel prices, growing freight volumes and highway congestion as well as other factors will continue to drive freight away from trucks and onto trains.

It leaves the railroad well positioned for 2007, he said.

“We’re clearly seeing a somewhat softer economy… but still our traffic volumes are at levels close to all-time highs, and I think that alone provides ample evidence that the railroad renaissance is alive and well,” Moorman said.

–Reach Gregory Richards at (757)446-2599 or gregory.richards@pilotonline.com.

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Copyright (c) 2007, The Virginian-Pilot, Norfolk, Va.

Distributed by McClatchy-Tribune Business News.

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