We issued an updated research report on Norfolk Southern Corporation NSC on Aug 12.
Coal Hits Q2 Results
Norfolk Southern reported mixed results for the second quarter of 2016 with earnings beating estimates and revenues lagging the same. However, both earnings and revenues declined on a year-over-year basis. As has been the case in the past quarters, decline in domestic coal shipments hurt results in the second quarter.
Coal revenues declined 25% to $339 million. A soft coal export market, declining natural gas prices and unusually mild winter temperature resulted in a 24% decline in volumes. On a year-over-year basis, both revenues and earnings declined in the second quarter. Apart from coal, intermodal revenues and merchandise revenues also declined.
Not only Norfolk Southern, players like Union Pacific Corporation UNP, Kansas City Southern KSU and CSX Corporation CSX have been dealt a heavy blow by coal. Since coal is a key revenue-generating commodity for railroad operators, it is only natural that the decline in domestic coal shipments has hurt stocks.
We are also concerned about the company’s high debt levels. The company exited the second quarter of 2016 with long-term debt of more than $9 billion. Apart from a rise in immediate finance costs, the high debt level will also require significant cash flows for repayments. The company’s debt- to capitalization ratio at the end of the second quarter was almost 44%.
We are, however, impressed with the company’s focus on rewarding shareholders through share repurchases and dividends. The company, which has paid dividends for 136 consecutive quarters, shelled out $350 million in dividends and repurchased shares worth $400 million in the first six months of 2016. The company intends to buy back shares worth $800 million in full-year 2016.
Moreover, the expanded 102-year old Panama Canal, which was officially inaugurated on Jun 26, is likely to lead to an increase in east coast container traffic. This has the potential to benefit railroads like Norfolk Southern.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment