Freight transportation company Norfolk Southern (NYSE:NSC) missed Wall Street’s revenue expectations in Q3 CY2024 as sales rose 2.7% year on year to $3.05 billion. Its GAAP profit of $4.85 per share was 53.5% above analysts’ consensus estimates.
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Norfolk Southern Corporation (NSC) Q3 CY2024 Highlights:
- Revenue: $3.05 billion vs analyst estimates of $3.09 billion (1.2% miss)
- EPS: $4.85 vs analyst estimates of $3.16 (53.5% beat)
- Operating Margin: 52.3%, up from 25.4% in the same quarter last year
- Profitability saw a one-time boost from the sales of two railway lines and an insurance reimbursement related to last year's East Palestine, Ohio Incident
- Free Cash Flow Margin: 21.1%, up from 0.2% in the same quarter last year
- Market Capitalization: $56.11 billion
Company Overview
Starting with a single route from Virginia to North Carolina, Norfolk Southern (NYSE:NSC) is a freight transportation company operating a major railroad network across the eastern United States.
Rail Transportation
The growth of e-commerce and global trade continues to drive demand for shipping services, presenting opportunities for rail transportation companies. While moving large volumes by rail can be highly cost-efficient for customers compared to air and ground transport, this mode of transportation results in slower delivery times, presenting a trade off. To improve transit times, the industry continues to invest in digitization to optimize fleets, loads, and even braking systems. However, rail transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Norfolk Southern Corporation’s 1.1% annualized revenue growth over the last five years was weak. This shows it failed to expand in any major way and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Norfolk Southern Corporation’s recent history shows its demand slowed as its revenue was flat over the last two years. We also note many other Rail Transportation businesses have faced declining sales because of cyclical headwinds. While Norfolk Southern Corporation’s growth wasn’t the best, it did perform better than its peers.
This quarter, Norfolk Southern Corporation’s revenue grew 2.7% year on year to $3.05 billion, falling short of Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 3.9% over the next 12 months, an acceleration versus the last two years. While this projection indicates the market thinks its newer products and services will spur better performance, it is still below average for the sector.
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Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.
Norfolk Southern Corporation has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 33%. This result isn’t surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Norfolk Southern Corporation’s annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.
This quarter, Norfolk Southern Corporation generated an operating profit margin of 52.3%, up 26.9 percentage points year on year. The increase was solid, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Norfolk Southern Corporation’s flat EPS over the last five years was below its 1.1% annualized revenue growth. However, its operating margin didn’t change during this timeframe, telling us non-fundamental factors affected its ultimate earnings.
Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Norfolk Southern Corporation, its two-year annual EPS declines of 11.4% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q3, Norfolk Southern Corporation reported EPS at $4.85, up from $2.11 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Norfolk Southern Corporation’s full-year EPS of $10.67 to grow by 23.9%.
Key Takeaways from Norfolk Southern Corporation’s Q3 Results
We were impressed by how significantly Norfolk Southern Corporation blew past analysts’ EPS expectations this quarter, mostly due to the sales of two railway lines and an insurance reimbursement related to last year's East Palestine, Ohio Incident. We were also excited its EBITDA outperformed Wall Street’s estimates. On the other hand, its revenue unfortunately missed. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 2.6% to $254.61 immediately after reporting.
Norfolk Southern Corporation may have had a good quarter, but does that mean you should invest right now?The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy.We cover that in our actionable full research report which you can read here, it’s free.