Ask The Experts: February 19, 2019
Independent Transportation Analyst and Consultant
Q: Overall what are your thoughts on Norfolk Southern's Investor Day in Atlanta?
A: This was a big meeting and it could have gone very badly – instead it was a great success. The market liked what they heard right away (the shares were up over 3% on the day); upon reflection I would like to see more (of course) – more numbers, more info, more education of the shareholder base (on OR/Capex/ROIC, etc); that’s always the case. But make no mistake - this opening salvo of the “Reimagined Norfolk Southern” hit the mark and then some. I was looking forward to this for months – no, years – and like a perfect Christmas when one is a child, it was worth the wait. Let’s just not wait as long next time.
Q: What do you think it will take for the Norfolk Southern Top-21 Plan to be able to deliver results in years two and three?
A: With 100bps coming out of the OR this year (and about 1/6 of the headcount reduction), there is a bit of trust required to believe that years 2 & 3 will deliver. Some of my suggestions are to simply build on what they shared – for example, to make a pledge to come back every couple or few years (a la Canadian National Railway) to update us and provide detail – even if we have to wait on the 2021 completion of this Plan and the official opening of the Atlanta HQ.
Q: What are your thoughts regarding Norfolk Southern's target numbers?
A: To hit the 60% Operating Ratio in three years means a reduction of close to 700bps – NSC uses 65.4% OR for the past (2018) year, while the Street sees that as more like 67% due to a big “lump” of RE sales in Q4. In point of fact, that makes the goal that much more bold. Yes, we saw huge OR reductions in the first years of PSR implementation before (CSX and CP), but from higher start points. A key point here is that the OR target – and even the 5% CAGR level for revenue growth in the Plan period – were above Street expectations.
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