(The Associated Press circulated the following story on January 25.)
NEW YORK — Shares of Norfolk Southern Corp. closed lower Thursday for the second straight session, after Credit Suisse downgraded the railroad operator on its weak quarterly report and lackluster forecast.
Norfolk Southern shares lost $1.79, or 3.5 percent, to finish at $48.82 on the New York Stock Exchange, having shed 4.5 percent of their value Wednesday after the company’s fourth-quarter earnings report.
While four of the company’s peers posted double-digit earnings growth this quarter, Norfolk Southern posted just a 6 percent rise in quarterly profit to $385 million, or 95 cents per share, on revenue of $2.32 billion. The results fell short of Wall Street’s consensus forecast for income of 96 cents per share on $2.39 billion in revenue. Norfolk Southern executives also said they expect manufacturing activity to slow in first half of 2007 before accelerating on the back end of the year.
Credit Suisse analyst Jason Seidl downgraded Norfolk Southern to “Neutral” from “Outperform” on Thursday, saying that while his long-term view of the railroad industry remains firmly intact, he believes Norfolk may have already reached a “near-to-immediate term peak.”
In a note to clients, Seidl said the company will probably enjoy strong pricing again this year, but volume growth will likely suffer from declines in coal shipments, as inventories at utilities remain high during a mild winter in the East. Automotive freight volumes also aren’t expected to lift results, as automakers continue production cuts.
Intermodal shipments, which involve transferring freight among varied types of transportation, such as loading shipping containers on rail cars for final delivery, will also weaken, Seidl said.
But John Larkin, an analyst with Stifel Nicolaus & Co., disagrees. Although he cut his target price to $57 from $62, he maintained a “Buy” rating on the stock, saying the underlying railroad investment story of robust pricing and strong demand remains unchanged and Norfolk Southern still ranks as an attractive name.
Larkin expects volumes to improve as the year unfolds and noted that the company has established a track record for consistently increasing its dividend, most recently lifting the payout 22 percent to 88 cents per share. And at the lowered target price, the stock still provides investors with upside of 14 percent, he said.
“We suggest this stock is even more attractive for long-term investors looking to buy a high-quality, well-positioned company at a relatively inexpensive valuation in an industry that should continue to benefit from several positive, secular trends for years to come,” Larkin said in a research note.
Thomas Wadewitz, an analyst with J.P. Morgan Securities, maintained his “Neutral” rating on Norfolk Southern, suggesting the railroad concentrate more on managing costs than trying to grow volumes amid soft demand from industrial sectors like automotive and home building. Coal demand could slow this year, too, he said.
Taken together, those factors limit Norfolk’s earnings growth over the next few quarters, said Wadewitz, who prefers Union Pacific and CSX Corp. in the sector.