Market Overview

Norfolk Southern's Operations Derailed, Analyst Downgrades To Sell

Norfolk Southern's Operations Derailed, Analyst Downgrades To Sell
Related NSC
Today's Pickup: What Midterm Elections May Mean For Transportation Funding
Introduction To Precision Railroading, Part 3: Where Do We Go From Here?

Railroad operator Norfolk Southern Corp. (NYSE: NSC) seems to be floundering on the operational front, if views from Loop Capital Markets is anything to go by.

The Analyst

Loop Capital Markets analyst Rick Paterson downgraded Norfolk Southern from Hold to Sell and lowered his price target from $133 to $120.

The Thesis

Train speeds, thus far in the fourth quarter, have been down 11.3 percent year-over-year, and the time taken to process cars through yards has been 6.7 percent more, Paterson said in a note. The analyst thinks this will begin to show up in the financials, in the form of higher labor overtime expense, care hire and equipment rents, higher purchased services and weaker fuel efficiency.

The company's operation is breaking under the strain of year-to-date volume growth of 4.7 percent, Paterson said, giving reasons for the weak operational metrics. Meanwhile, the company blamed the predicament on recent hurricanes and some higher-than-normal disruptive track maintenance work.

The weakness of operations leaves the company vulnerable to any potential unforeseen developments. Loop Capital sees the upcoming winter and the continuing operational restructure at CSX Corporation (NASDAQ: CSX), which has been pushing incremental volumes onto Norfolk Southern's network as risks.

"The point here is that the risks are asymmetric—in an attempt to squeeze out a few more basis points in operating margin, management is risking a much greater reaction on the downside, and one that would take at least 12 months to remedy and may put its target of a 65% operating ratio by 2020 out of reach," Paterson said.

As such, the firm lowered its 2018 earnings per share estimate from $7.07 to $6.75 and its 2019 estimate from $7.80 to $7.50.

The Price Action

Norfolk Southern stock is up 20 percent in the year-to-date period, trading north of $126 per share.

Related Links:

Riding The Rails: Canadian Train Stocks Preferred To CSX, Union Pacific

A Railroad Pair Trade: Kansas City Southern Vs. Union Pacific

Latest Ratings for NSC

Oct 2018Morgan StanleyMaintainsUnderweightUnderweight
Oct 2018Credit SuisseMaintainsOutperformOutperform
Oct 2018BairdMaintainsNeutralNeutral

View More Analyst Ratings for NSC
View the Latest Analyst Ratings

Posted-In: Loop Capital Markets Rick PatersonAnalyst Color Downgrades Price Target Analyst Ratings Best of Benzinga


Related Articles (CSX + NSC)

View Comments and Join the Discussion!

Latest Ratings

XECImperial CapitalDowngrades35.0
SSTIImperial CapitalUpgrades49.0
AVDLoop CapitalUpgrades29.0
FCREYDeutsche BankUpgrades0.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

5 Top Publicly Traded Companies In Michigan

Why Nvidia Will Play An 'Integral' Role In The Future Of Tech