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Norfolk Southern Retreats on Slower Profit

The railroad operator warns that the weak auto and housing markets and lower income from real estate investments will hurt first quarter earnings

After Norfolk Southern (NSC) warned that its earnings from the railroad business slowed during early 2007, investors sold the stock on Apr. 5. The company transports supplies such as coal, lumber, auto parts, and crushed stone; as the housing and automotive sectors took hits during recent months, those customers didn’t need to ship as many construction materials.

The Norfolk, (Va.) company said in a statement Apr. 4 that its first quarter 2007 diluted earnings per share will be around 3% below what it had earned in the same quarter 2006, principally due to reduced carload volumes. In the comparable quarter a year ago, the company generated net income of $305 million, or 72 cents per share.

Norfolk Southern's volumes during the first quarter 2007 fell 4.4% compared to a year earlier. Adding to the troubles it suffered from the slowdown in the automotive and housing sectors, winter weather crimped Norfolk's operations more than during the milder season in 2006.

Norfolk Southern also warned that it will have lower income related to property sales during the first quarter 2007. The company had enjoyed a windfall of $19 million in gains on its properties and investments during the first quarter 2006, compared to $7 million during the March quarter of 2005.

Analysts surveyed by Thomson Financial had expected Norfolk Southern to earn 75 cents per share during the first quarter, or 4.2% more than in the same period of 2006.

The stock fell 1.1% to $50.49 in midday trading on the New York Stock Exchange Apr. 5.

A couple of Wall Street analysts remained positive on the shares, including John Larkin at Stifel Nicolaus and Edward Wolfe at Bear Stearns, according to the Associated Press.

Standard & Poor's Equity Research analyst Kevin Kirkeby kept a hold recommendation on the shares. "While we believe NSC has the greatest exposure of the major railroads to the residential construction and auto markets, we believe most of the bad news is already reflected in the share price," Standard & Poor's he said in a research note. The analyst lowered his first quarter earnings per share estimate by 13 cents to 70 cents, and his full-year 2007 forecast by 17 cents to $3.80, but reiterated a 12-month target price for the stock of $54. (S&P, like, is owned by The McGraw-Hill Companies.)

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