Whos' Making Money, the Employees or the Shareholders?

In these recessionary times, the answer might surprise you.

Provided, as information, by the Teamster's Department of Capital Strategies

Following is a summary of Class I Rail Carrier earnings for the 3rd quarter of 2010.  CSX and Union Pacific were the first to report, and earnings were so strong they immediately caused investors’ expectations to shoot up so that in-line reports were not sufficient for the rest of the rails.  The Canadian carriers underwhelmed; KSU’s bounce back from Hurricane Alex was impressive; Norfolk Southern didn’t blow anyone away but they have the best analyst stock ratings nonetheless.

Rail Earnings Summary 3rd Quarter 2010

CSX (reported October 12, 2010)
Price: $57.26

• Reported ongoing earnings per share of $1.14 after adding back a tax item, slightly besting analyst consensus expectations for earnings of $1.04

• Generally seen as a very positive report for CSX, with high margins from both good cost control and strong pricing
  
  • Pricing improved 6.5%; yields were up 6%
  • Revenues increased 16.5%
  • Operating ratio of 69.1% was the company’s best ever

• Productivity gains on the labor line: crew starts up just 6% while volumes were up 10% year over year
  
  • Expenses excluding fuel were up 6.4%, also lower than the volume increase
    

• Coal volumes and pricing are expected to remain stable and strong through the fourth quarter

• Analyst Opinion:
  o    Tom Wadewitz of JP Morgan: Rating is Overweight (buy) with price target $74
  o    Ed Wolfe of Wolfe Research: Rating is Peer Perform (hold) with no price target
  o    Chris Ceraso of Credit Suisse: Rating is Outperform (buy) with price target $80
  o    Scott Malat of Goldman Sachs: Rating is Sell with price target $60

Union Pacific (reported October 21, 2010)
Price: $85.26

• Reported earnings per share of $1.56, beating analyst expectations for earnings of $1.50

• Although quarterly results were very strong and topped analyst expectations, the stock price fell nevertheless as investors’ expectations were not met

• Total yield growth was 6% on core pricing increases of 5.5%

  • Analysts expect continued strong pricing through 2011 as more contracts come up

• Cost side performance was extremely strong, with costs excluding fuel up jut 7.2% compared to a 13.8% increase in volumes

• Volume growth in 2011 is expected to slow considerably; however, if strong pricing continues then the company has an opportunity to once again increase margins

• Operating ratio of 68.2% was a record for the company as strong operating leverage continued

• Revenues were up 20% which was generally in line with analyst expectations

• There could be more cost pressures coming up as more hiring and wage inflation as well as higher capital expenditures are expected going forward

• Analyst Opinion:
  o    Tom Wadewitz of JP Morgan: Rating is Overweight (buy) with price target $102
  o    Ed Wolfe of Wolfe Research: Rating is Outperform (buy) with price target $105
  o    Chris Ceraso of Credit Suisse: Rating is Outperform with price target $110
  o    Scott Malat of Goldman Sachs: Rating is Neutral with price target $95
  

Norfolk Southern (reported October 28, 2010)
Price: $61.35

• Reported earnings per share of $1.19 compared to analyst expectations of $1.09 per share; however, excluding many one-time items such as property sales, results were largely in line with expectations

• Similar to Canadian Pacific, Norfolk Southern likely faced raised investor expectations after seeing strong reports from so many other rails

• Coal volumes were very strong, up 14.6% in the quarter
  
  • But can this trend continue with cheap natural gas prices?
    
• Management refused to be transparent about pricing trends, leading analysts to suspect that pricing was not as strong as at some other rails

• Headcount was up 2.6%, compared to the 1% increases at competitors CSX and Union Pacific
  
  • Operating leverage was still strong; just not as strong as others
    
• Revenues were up 19% in the quarter on a 15.1% increase in volumes
  • Carload yield was up 3.4%

• Analyst Opinion:
  • Tom Wadewitz of JP Morgan: Rating is Overweight (buy) with price target $74
  • Ed Wolfe of Wolfe Research: Rating is Outperform (buy) with price target $64
  • Chris Ceraso of Credit Suisse: Rating is Outperform (buy) with price target $77
  • Scott Malat of Goldman Sachs: Rating is Neutral with price target $62

refer questions to:
Jamie St. Laurent
Corporate and Financial Research Analyst
Department of Capital Strategies
International Brotherhood of Teamsters
25 Louisiana Ave; Washington, DC  20001
Ph: 202.624.8707
Fax: 202.624.6833

Download complete report, including data on Canadian National, Canadian Pacific, and Kanas City Southern as a .pdf