Norfolk Southern lays out cost cuts and 5% sales targets at Investor Day (NSC)

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Last Update: 11-Feb-19 12:30 ET

Norfolk Southern (NSC 177.83, +6.37, +3.72%) has broken out to a four-month high as the company hosts its Investor Day in Atlanta today.

The company laid out its strategic plan in a press release this morning. The Eastern Class I rail is targeting an operating ratio improvement of at least 100 basis points this year (from 65.4% in 2018) and a 60% mark by 2021.

Norfolk Southern is the latest rail to implement precision scheduled railroading to dramatically improve operational efficiency and investment returns.

It's all about volume and pricing for the railroads. One thing management has a greater ability to control to drive profits is operating expense. The operating ratio represents operating expenses over revenue. Driving that as low as possible, without sacrificing safety or service, goes hand in hand with driving the stock price higher.

Precision Scheduled Railroading has quickly become the industry standard in the U.S. The practice’s intense focus on cutting cost has served railroad investors well.

Norfolk's Eastern Class I rival CSX (CSX +1%) was the first U.S. rail to implement it after rail legend Hunter Harrison took the reigns in early 2017. The company has been able to execute despite the passing of Mr. Harrison in December of that year. CSX's operating ratio fell over 710 basis points to 60.3% in 2018.

Union Pacific's (UNP) stock surged last month after the company hired Hunter Harrison disciple Jim Vena as COO to implement precision scheduled railroading.

This morning, Norfolk Southern also guided for revenue growth at a compound annual rate of 5%, capital expenditures between 16-18% of revenues through 2021, a dividend payout ratio of 33%, and continuance of share repurchases using free cash flow and borrowing capacity. The revenue outlook compares favorably to consensus, which stands at 4% for the next two years before slowing a bit in 2021.

Norfolk has reported revenue growth for eight quarters in a row. The company has also exceeded estimates on the top line six quarters in a row. Management raised the dividend 8% in January, giving the stock a ~2% dividend yield.

With a $47 bln market cap, NSC trades at ~17x EPS, which is comparable to CSX and a slight discount to UNP.