Norfolk Sets Rail-Earnings Tone as Weak Traffic Damps Profit

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Norfolk Southern Corp. heralded a difficult season for railroad profits with preliminary first-quarter earnings that trailed analysts’ estimates after coal carloads and fuel surcharges dropped.

Revenue will decline this year, Norfolk Southern President Jim Squires said on a conference call Tuesday. Labor costs increased as the railroad hired people to help improve service.

“Coal is likely to remain tough,” said Squires, who takes over as chief executive officer on June 1. “Also, the next few quarters will face difficult overall comparisons to last year.”

U.S. carriers posted no growth in carloads in the first three months of 2015, according to Association of American Railroads statistics. They felt the sting of utilities switching to cheaper natural gas from coal; slower growth in oil train traffic as crude prices fell; and a drag on container shipments amid worker slowdowns at U.S. West Coast ports.

Norfolk Southern fell 5.9 percent to $98.66 at 9:47 a.m. in New York after saying Monday that earnings declined about 15 percent to $1 a share from a year earlier. Analysts expected the Norfolk, Virginia-based company to earn about $1.26, according to estimates compiled by Bloomberg. Union Pacific Corp., the largest U.S. railroad, dropped 2.2 percent and CSX Corp., which reports earnings Tuesday after the market close, decreased 1.4 percent.

‘Big Miss’

“It’s a pretty big miss,” said Lee Klaskow, a Bloomberg Intelligence analyst. “There will be an overhang until they begin to improve their execution.”

Bad weather in the Northeast hurt train speeds, driving up costs for overtime and additional crews, said Chief Executive Officer Charles “Wick” Moorman.

“We believe that most of these issues are transitory in nature and by the second half of the year should be largely abated,” he said. The difficulties from lower coal volume and surcharges will continue, he added.

Norfolk Southern is the second-biggest railroad in the eastern U.S. Its announcement came more than two weeks ahead of its full release on April 29. Kansas City Southern is set to report on April 21, followed on April 23 by Union Pacific.

Norfolk Southern said revenue was about $2.6 billion, a 5 percent decline from a year earlier. Analysts had predicted revenue of $2.67 billion.

Diesel Drop

The drop in diesel prices has hurt railroads’ revenue because of fuel surcharges they levy based on the cost of fuel. Norfolk Southern has taken an outsized hit on the fees because it ties them to West Texas Intermediate crude, whose decline has outstripped diesel’s.

Norfolk Southern’s “unique fuel surcharge headwind” may mean slower growth than at CSX, the largest railroad in the Eastern U.S., in 2015 and 2016, Benjamin Hartford, an analyst with Robert W. Baird & Co., said in a research note.

When WTI is less than $50 a barrel, Norfolk Southern receives no surcharges from customers, Klaskow said. The price averaged $48.57 during the quarter, according to data compiled by Bloomberg.

CSX Earnings

CSX also faces a decrease in coal shipments. Unlike Norfolk Southern, CSX ties its fuel surcharges to the price of diesel, which lessens that impact.

CSX probably will say first-quarter earnings rose to 44 cent a share, according to the average of analyst estimates compiled by Bloomberg. The analysts expect revenue to increase to $3.02 billion.

Lower-than-anticipated rail traffic had led most analysts to pare their profit expectations, with estimates for CSX dropping more than 3 cents since last month, according to data compiled by Bloomberg.

Kansas City Southern cut its 2015 revenue forecast to “low single-digit” growth last month from “mid single-digit” because of lower coal and oil traffic. The strong dollar also weighs on earnings for the railroad, which gets almost half of its sales from Mexico.

Analysts have cut their profit estimates for Union Pacific by more than 7 cents on average since last month.

Canadian railroads have seen little movement in analysts’ estimates. Canadian Pacific Railway Ltd. and Canadian National Railway Co. both benefited from cargo diverted to the Vancouver and Prince Rupert ports during the U.S. West Coast port slowdown and from a strong dollar, boosting their U.S. revenue when translated to Canadian dollars, Klaskow said.

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