Railroad operator Norfolk Southern (NYSE:NSC) delivered an outstanding second quarter thanks mostly to shipping volume increases. Revenue and earnings rose substantially, and the company expects traffic increases to continue despite the uncertainty in the strength of the economic recovery. Norfolk Southern's improved business, along with those of the other railroads, is regarded as a positive indicator for the economy.
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Effects of Increased Traffic
Shipment volume was up 22% for the quarter, the fourth consecutive quarterly increase. Norfolk Southern has returned 27,000 rail cars to service, with 8,000 remaining in storage from the recession. Most of the workers furloughed during the recession have been returned to work as well. This has been a quietly positive effect of Norfolk's increased business.
Norfolk's Numbers
Profits jumped by 59%, from earnings per share of 66 cents on $247 million net income in last year's second quarter, to EPS of $1.04 on $392 million net income this quarter. Revenue rose from $1.86 billion to $2.43 billion, a 31% climb. Higher prices as well as better operating efficiency and increased traffic were factors in the company's strong performance.
"General merchandise" revenue, the largest traffic category, which includes shipments of a wide range of goods such as cars and lumber, was up 31% to $1.3 billion. Coal shipments increased by 36% .This includes coal for steel-making as well as for utilities, with coal for electricity generation making up the bulk of Norfolk's coal business.
Rails and Other Transports
CSX (NYSE:CSX), Norfolk Southern's eastern railroad rival, reported second-quarter earnings on July 12 of $1.07 per share compared to 77 cents in last year's same quarter. CSX's story anticipated Norfolk Southern's results. CSX reported revenue of $2.7 billion, up 22%on volume increases, and its optimistic economic outlook prepared the investment community for more of the same from Norfolk Southern.
The rails are not the only good news economically. Transports FedEx (NYSE:FDX) and UPS (NYSE:UPS) reported more optimistic economic outlooks along with their earnings. Again, many investors regard these companies as a window into the current and future health of the economy. Other industries have been showing signs of improvement as well, with companies such as Corning (NYSE:GLW) reporting strong demand.
Further Economic Soundings
The indicators for the economy are not one-sided, however. Commerce Department numbers for June's durable goods orders, which came out on July 28, showed a decrease of 1%, where a 1% increase was expected. Yet the International Air Transport Association (IATA) reported that June air freight volume increased 27%. A number of other businesses are showing pockets of improved business activity, despite the persistence of difficulties and soft demand in many areas. But the Fed's recent Beige Book report used terms like "modest," "slow" or "choppy" for the economic recovery. This underscores the selective, mixed picture of economic recovery.
What About Norfolk Southern's Recovery?
Norfolk Southern's CEO Wick Moorman continues to see a positive outlook for the rest of the year for the company. Auto manufacturers such as Ford (NYSE:F) should contribute to shipping volume increases. Industry observers agree that Norfolk Southern's overall business volume will continue to pick up this year.
The Bottom Line
We like Norfolk Southern's fundamentals and long-term prospects. The company also raised its dividend, has authorized a share buyback program, and carries a respectable $1.1 billion in net cash, compared to $6.3 billion in debt in a capital-intensive industry. Over the long haul, Norfolk Southern is one of the best railroads and a worthwhile stock to own. (For more insight, see Cash-22: Is It Bad To Have Too Much Of A Good Thing?)
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