(The following article by Christopher Dinsmore was posted on the Virginian-Pilot website on October 21.)
NORFOLK, Va. — Boosted by surging Asian imports, renewed coal exports and increased freight rates, Norfolk Southern Corp. more than doubled its third-quarter profit, the railroad announced Wednesday at a meeting with analysts in New York.
Based in Norfolk, the nation’s fourth-largest railroad made $288 million in the quarter ended Sept. 30, up from $137 million in last year’s third quarter. Per-share earnings rose to 72 cents from 35 cents.
Much of the gain came from a 16.2 percent spurt in revenue to $1.86 billion in the third quarter from $1.6 billion a year earlier. Norfolk Southern attributed the revenue growth to increases in both freight volume and rates.
“By any measure, this was an extremely strong quarter for our company,” said David R. Goode, chairman and chief executive officer of Norfolk Southern, which operates a 21,500-mile rail network in 22 states, Washington, and Ontario, Canada. “We demonstrated uniform strength in the face of a robust peak traffic season, and our people and network performed well.”
Some analysts believe Norfolk Southern’s revenue gains have come somewhat at the expense of CSX, its slightly larger rival based in Jacksonville, Fla. Already suffering from congestion on its system this summer, CSX’s system was hampered further by the active hurricane season.
“They not only stole volume from CSX, but they got price increases on that volume for getting the shipments delivered,” said Donald Broughton, an A.G. Edwards & Sons analyst in St. Louis. “Norfolk should be able to sustain growth at least for the next several quarters as long as the economy cooperates.”
CSX isn’t scheduled to announce its quarterly results until Oct. 28 .
For Norfolk Southern, the quarter’s results included a non cash gain of $53 million, or 13 cents per share, from a corporate reorganization of Conrail, a subsidiary that was jointly held with rival CSX Corp. In the reorganization, the two railroads took ownership of the assets they had been leasing from their shared Conrail subsidiary, completing the break-up of that northeastern railroad, which began with their 1999 takeover of it.
Even excluding that one-time gain, Norfolk Southern would have made $235 million, or 59 cents per share – 71.5 percent more than a year earlier. Those operating results exceeded analysts’ expectations of 54 cents per share in earnings, reported by Nelson Information.
The railroad’s stock, already up 31 percent this year, rose 7 cents to $31.08 a share in New York Stock Exchange trading on Wednesday.
So far this year, Norfolk Southern has earned $659 million, or $1.66 a share, on revenues of nearly $5.4 billion. In the first nine months of 2003, the railroad made $483 million, or 92 cents per share, on $4.8 billion in revenue.
The third quarter also demonstrated Norfolk Southern’s success at controlling expenses as its operating income – or revenue less expenses – grew to 25.3 cents on every $1 of revenue from 19.5 cents a year earlier. It was the railroad’s best quarterly margin since the Conrail takeover.
Norfolk Southern saw revenue gains in each of its principal revenue segments – merchandise, coal and intermodal, which is the shipment of truck trailers and international shipping containers by rail. Revenue gains outpaced volume growth across the board, showing Norfolk Southern’s ability to raise rates.
Intermodal revenue surged 28 percent to $404 million in the quarter as volume grew 21 percent. The railroad is seeing more imports through the East Coast ports it serves from Asia and is increasing successful at diverting domestic cargo from the highway, said Donald W. Seale, the railroad’s executive vice president-sales and marketing.
“Strong demand continues to be driven by the convergence of an expanding economy led by higher consumer spending, industrial production, and international trade, coupled with constraints in truck capacity,” Seale said. “We have also successfully aligned our international services with East Coast ports, allowing us to benefit from the continuing trend to all-water service from the Pacific Rim to Eastern U.S. markets.”
Norfolk Southern saw revenue gains across its merchandise business, which was up 10 percent to just over $1 billion. Volume grew in every segment save automotive shipments, which were off 2 percent as auto sales slowed in the third quarter.
Third-quarter coal revenue jumped 20 percent to $447 million on increased volumes of coal for producing electricity and steel, particularly for export. Much of Norfolk Southern’s export coal is shipped through its Lamberts Point coal terminal in Norfolk.
“Export coal volume was strong in the quarter increasing 49 percent due to sustained strong global demand for high quality metallurgical coal,” Seale said. “Further, ocean vessel rates continue to favor U.S. coals. On the demand side, China’s growing consumption of coal for steel production and for electricity generation has kept the global coal markets tight.”
Wednesday’s announcement also served as something of a coming-out party for new Norfolk Southern President Charles W. “Wick” Moorman, who spoke to the analysts immediately after Goode. He likely will succeed Goode when he retires in January 2006.
“I believe our exceptional third-quarter and year-to-date results validate our strategy of providing higher-value transportation products driven by premier operating performance and show the importance to all of us of continuing to execute well,” Moorman told the analysts. “We are committed to maintaining and improving our service quality to give Norfolk Southern a competitive advantage and an increasingly valuable product going forward.”
Bloomberg News contributed to this report.