Norfolk Southern Falls as Profit Echoes FedEx Slowdown

Norfolk Southern Sees Profit Trailing Estimates as Volumes Drop
Decreases in coal carloads and so-called intermodal shipments, which can move by a combination of train, truck and ship, will reduce revenue by about $120 million from a year earlier, while fuel surcharges will be about $80 million less, Norfolk Southern Corp. said. Photographer: Andrew Harrer/Bloomberg

Norfolk Southern Corp. tumbled the most in more than three years after saying quarterly profit will fall short of analysts’ estimates as volumes dwindle at the second-largest eastern U.S. railroad.

The shares slid 9.1 percent to $66.11 at the close in New York, the biggest decline since March 2009. The rest of the North American industry also slumped on concern that the decline in shipments adds to evidence that the U.S. economic recovery is losing steam.

Norfolk Southern’s disclosure late yesterday built on FedEx Corp.’s cut in its annual earnings forecast a day earlier, when the operator of the world’s largest cargo airline cited falling demand and a shift to cheaper delivery services. United Parcel Service Inc. and Canadian National Railway Co. executives also said today that they see challenging economic conditions.

“You do have some macroeconomic factors at work requiring less demand in terms of shippers,” Robert Dye, chief economist at Dallas-based Comerica Inc., said in a telephone interview. “That is symptomatic of a global economy that is cooling and a U.S. economy that is still struggling to find traction.”

Union Pacific Corp., the country’s biggest railroad, slumped 3.3 percent to $120.95, and Kansas City Southern declined 2.8 percent to $76.90. CSX Corp., the largest eastern carrier, dropped 5.7 percent to $21.49.

Canadian National, that country’s biggest railroad, tumbled 4.5 percent, the most since January, to $C87.44 in Toronto.

‘Soft Patch’

“We see there are certain markets, certain areas where we’re in a bit of a soft patch,” Canadian National Chief Financial Officer Luc Jobin said at the Citi Global Industrials conference in Boston. “We can see it in steel, we can see it in iron ore.”

Volume at Norfolk Southern will decline about 2 percent in the third quarter to 1.78 million carloads, with coal dropping 13 percent and general merchandise down 1 percent, the Norfolk, Virginia-based railroad said at the Citi event.

“The summer drought has dramatically changed the landscape of the U.S. grain market,” CFO John Rathbone said. The decline in utility coal volumes will probably “begin to moderate,” depending on the severity of winter weather and competition from cheaper natural gas, he said.

Norfolk Southern

Quarterly profit at Norfolk Southern will be $1.18 to $1.25 a share, according to a railroad statement, short of the $1.63-a-share average estimate of 27 analysts surveyed by Bloomberg. The drop in shipments and reduced fuel-surcharge receipts will pare revenue by $200 million, according to the Norfolk, Virginia-based carrier, which reports earnings Oct. 23.

UPS projects short-term economic headwinds amid a decline in manufacturing orders in Asia while the company works to finish its acquisition of TNT Express NV in Europe, Dan Brutto, the head of its international division, said today at a Bloomberg Government breakfast in Washington.

Slowing economies in the U.S. and Europe have damped growth in international trade over the past several months, creating a drag on shipping demand and hurting expansion in China, FedEx Chief Executive Officer Fred Smith said on Sept. 18.

UBS AG downgraded Norfolk Southern, CSX and Union Pacific from buy to neutral and Kansas City Southern to sell before Norfolk Southern’s announcement.

‘Mediocre Recovery’

“The European debt crisis and related economic slowdown combined with slower growth in Asia and a mediocre recovery in the U.S. have hurt airfreight volumes and trucking demand,” Kevin Crissey, a New York-based analyst with UBS, said in a note to clients.

“Rails have some good commodity trends, but were hit by a massive drop in coal volumes as natural gas prices plunged and now face a weak harvest,” as well as softening demand for metallurgical coal with lower steel demand in China, he said.

Rail volumes historically have started to peak in the last two weeks of August as shipments of consumer products bound for store shelves converge with the U.S. harvest and coal for utilities’ winter stockpiles.

Instead, the Midwest drought scorched crops, and some electric utilities have been burning cheaper natural gas rather than train-hauled coal. Railroads from CSX to Warren Buffett’s Burlington Northern Santa Fe say they’re now bracing for muted gains in the usual pre-holiday shipping season because of weak consumer sentiment.


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