Important from yesterday’s town hall was commentary that PSR implementation is going to be slower than what we saw at CSX given in our view changes to the regulatory environment and the proposed management team’s focus on the customer […] Overall, we view this plan as contrasting heavily against Norfolk’s Resilience Model and expect headcount reduction can be achieved on the back of attrition, in addition to head office cuts.
NSC's activist campaign appears to have unanimous support from institutional investors.
We see value in potential management change with Jim Barber as CEO and Jamie Boychuck as COO as proposed by the activist investor Ancora… especially given the historical margin underperformance of Norfolk Southern.
The bottom line is the cost of NSC's new COO appears higher than the headline would suggest. In addition to the $25 million one-time payment, it could also include capex to elongate sidings and concessions that lead to less volume for NSC and more volume for CP and CSX. More details and transparency is needed, in our view, given the company could have hired Jamie Boychuk with no concessions, who we consider to be best suited to be the COO of NSC given his long and successful track record.
It appears NSC is making the case that changing the Board and management would pose significant risk to service and safety. But in reality, NSC has already endured the most service and safety challenges in recent years, including the unfortunate events of East Palestine last year, and defective chassis across its network that impacted service and posed safety risks in 2021.
NSC is a deeply underperforming rail when compared to its peers… there's 1,000 basis points of margin gap between itself and the best Rail (CP), and 500 basis points of margin gap between itself and its direct competitor (CSX), which equates to $600 million of operating profit. And we don't believe the company's current three-year profit improvement plan implies any narrowing of that gap.
NSC appears to be running a marketing and service led culture instead of one that starts with the operating plan.
The LT guidance does not necessarily indicate urgency. We called out NSC’s LT guidance post their 2022 Investor Day as being relatively modest in ambition (at least relative to expectations) and mgmt… A 450 bp (high end of guidance) improvement over 3 years, does not get NSC back to where their peers are today (or indeed where NSC itself was a year ago), and peers will surely continue to improve OR … in the coming years.
[I]f the company just hit the high end [of guidance] every year for the next three years, NSC’s OR would still be below where its East Coast peer was in 2023. We do not view new financial guidance as closing the gap with competitors as management suggested…
Norfolk has long been an underperforming self-help story that simply can't figure out how to help themselves ... The company is looking for 3% revenue growth which does not keep up with inflation, while industry leading revenue growth. They talk about moving to industry competitive margins by 100-150bp annual improvements, although they are now 700bp beneath the group…
We are concerned about long-run OR improvement. We don’t think 100-150 bps of improvement over 3 years is enough… Also, we didn’t come away from the call satisfied that there is a dramatic enough change in approach from management to address the issue.
Given that all four public peers are expected to be in the 60% to 61% next year - even if these peers were not to improve at all after that, it would take NSC six years to get to a margin level in line with its competitors.
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