Norfolk Southern's $600M Agreement To Solve East Palestine Derailment Is A Negative, Says Analyst

RBC Capital analyst Walter Spracklin reiterated a Sector Perform rating for shares of Norfolk Southern Corp NSC with a price target of $270.

The company reported preliminary first-quarter FY24 revenues of $3.004 billion and an adjusted EPS of $2.49.

The company reiterated guidance for the operating ratio improvement of 400 basis points in H2/24 and a sub-60% operating ratio over the next 3-4 years, in line with the analyst's expectations.

The analyst expects new operating management to enact meaningful change at Norfolk.

NSC also reached a $600 million agreement in principle to resolve a consolidated class action lawsuit relating to the East Palestine derailment.

According to the analyst, the $600 million was incremental to the $1.1 billion of impact from environmental and legal costs and represented roughly 22% of FY24 consensus net income and was an important negative.

The analyst lowered the first quarter EPS estimate to $2.49 from $2.61 and second quarter  to $2.65 from $2.95 to reflect lower revenue.

NSC's exposure to coal (14% of FY23 revenue) will act as a headwind to earnings into the future, noted the analyst.

The analyst, though, was constructive on the rail sector and the view was based on limited and rational competition, high barriers to entry and sustainable growth in demand.

The analyst expected these attributes to drive real rate increases, volume growth and margin expansion over the long term supported by service improvements, efficiency initiatives and the implementation of smart technology. 

NSC Price Action: Norfolk Southern shares are trading lower by 1.769% at $249.25 at publication Wednesday.

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Photo: Courtesy Norfolk Southern