Norfolk Southern (NS) seemed to have a good Q4/19. What stood out to you?

Hatch Anthony

There was a lot to like in NSC’s Q4/19, to be sure:

  • Network Performance improvement – As stated by COO Wheeler (not Farrell), train (not car, as per their peers) speed was up 17%, dwell down 30% (FY; for Q4/19 it was +19/-24); the five KPIs all showed improvement, including a 50% jump in their Service Delivery Index (SDI).  With a lot of noise, to be expected in any final quarter, their “core OR improvement” was 240bps, and they reduced operating expenses by 5% (headcount was down 16%).  Their newfound resiliency showed in their recovery from a mainline derailment, expected to cost $25mm (Q3/19 call) came in at $13mm. 
  • The earnings call served as the coming-out party for rail debutant Mark George, their new CFO, who, as Mainers would say, is “from away” (UTX), rare for the railroads and especially for the Thoroughbred.  He did a fine job. And was refreshing (in 2020 “we fell a little bit short”).  His plan to study Capex (“I want to understand the rationale for the spends that we have; the justification financially and the prioritization….”) is as to be expected and while likely thrilling for those on the call, in this day and age, made be a tad….nervous.  NS will spend about 5% less this year than last but as of now is sticking with the 16-18% of revenues Capex guidance (with a few questions on that as compared to the two peers, UNP and, especially, CSX).  There is clearly latent capacity.
  • With their flattish revenue guidance, which as noted was slightly more “optimistic” than the guidance issued by CSX, that includes a recovery in volume in Intermodal.  This is the NSC growth generator and this year’s performance will be very interesting and instructive.  There was some confusion on IM’s incremental (as opposed to overall margins, but clearly the domestic opportunity is (and has to be ) priority #1….
  • They expect “greater than 235bps” OR improvement in 2020 and reiterated their 60% OR Target for 2021.