Wall Street Concerned Over Norfolk Southern

• The share price of Norfolk Southern Corp. NSC has declined 31.59 percent over the past one year, to reach a low of $67.73 on January 25.
• Jeffrey Kauffman of Buckingham Research has downgraded the rating on the company from Buy to Neutral, while lowering the price target from $82 to $78. Avondale Partners’ Donald Broughton has upgraded the rating from Market Underperform to Market Perform, with a price target of $65.
• The company reported its 4Q15 EPS below the analysts’ estimates, and both analysts expressed concern regarding the lack of earnings catalysts during 2016.

Fading Near Term Catalysts

Analyst Jeffrey Kaufman of Buckingham Research mentioned that Norfolk Southern reported its 4Q15 EPS at $1.20, below the estimate of $1.29. The EPS included about $0.10 in restructuring costs and benefited from a lower than anticipated tax rate.

“The primary drag quarter was lower than expected yields, and higher than expected labor costs, as headcount remained relatively flat,” Kaufman noted.

Kaufman expects the growth environment to be slower in 2016 than earlier anticipated, and mentioned that the company has been slow in responding to the environment, as compared to its peers.

Although a potential merger with Canadian Pacific Railway Limited (USA) CP is not completely off the table, Kaufman believes that the “near term likelihood of a merger catalyst has declined meaningfully.”

The EPS estimate for 2016 had been reduced from $5.40 to $5.34.

Strategic Plan in Place

Avondale Partners’ Donald Broughton stated that the company reported its 4Q EPS below the consensus and the estimate, with railway operating revenues declining 12.3 percent and overall volume declining 6.5 percent during the quarter.

Broughton pointed out, however that Norfolk Southern had “put in place a strategic plan that is designed to generate revenue growth through pricing and increased volume in service-sensitive markets.”

The company intends to achieve an operating ratio below 65 percent by 2020 by attaining over $650 million in annual productivity savings during the same period.

The company is also targeting an operating ratio of less than 70 percent during 2016. “Management stated that they intend on reducing headcount by approximately 2,000 positions by 2020 and 1,200 fewer positions in 2016,” Broughton said.

Broughton believes that the company’s 2020 target is achievable, although given the expectations of a difficult macro and pricing environment for rails, the 2016 target is unlikely to materialize.

“We continue to see negative earnings for FY2016 versus FY2015 and see potential downside in valuation as a result,” Broughton added.

The EPS estimate for FY2016 has been lowered from $5.04 to $5.00.