Norfolk Southern beats third-quarter expectations: Fuel recovery supports profit as higher cost guidance leaves improvement outlook intact
Third-quarter adjusted earnings per share exceeded consensus by about 4%, with fuel surcharges accounting for most of the revenue upside to Bernstein’s forecast. Full-year expense guidance was raised again, but cost guidance excluding incremental fuel fell. Together with stronger coal demand, this led the firm to view market earnings expectations for 2027 as achievable.
Original source：BernsteinFirst published on Unhidea：Original source date：
Key takeaway
Bernstein believes fuel cost recovery, base pricing and an improved traffic mix are sufficient to support upward earnings revisions. However, operating profit excluding the net fuel contribution was slightly below its forecast this quarter, and service levels remained below last year’s.
What primarily drove the earnings-per-share beat?
Norfolk Southern reported adjusted diluted earnings per share of $3.62 in the third quarter of 2026, about 4% above the Bloomberg consensus of $3.47. This measure excludes $42 million in merger-related expenses and $28 million in expenses related to the East Ohio incident, which together affected earnings per share by $0.25.
Revenue of $3.526 billion and adjusted operating profit of $1.22 billion exceeded market consensus by approximately 1% and 3%, respectively. The adjusted tax rate of 22.9% was below the expected approximately 23.5%, providing a further lift to earnings per share.
Compared with Bernstein’s own forecast, nearly all of the revenue upside came from fuel surcharges: fuel surcharge revenue was $468 million, $28 million more than the firm expected; revenue excluding fuel surcharges was $3.058 billion, broadly in line with expectations. The net fuel contribution was $48 million, above the firm’s estimate of $25 million, but core operating profit excluding that contribution was approximately $8 million below its forecast.
Did the underlying business improve beyond fuel?
Volume grew approximately 3% year on year in the quarter, in line with Bernstein’s expectations; revenue per unit excluding fuel surcharges also grew approximately 3%. Thus, underlying revenue growth was supported by both volume and pricing.
The shift in intermodal mix was particularly pronounced: domestic shipment volumes rose 10% year on year, international volumes fell 8%, and revenue per unit excluding fuel grew 4%. Bernstein believes rising road transport costs are beginning to benefit intermodal; coal was supported by a 10% increase in export tonnage.
Adjusted operating profit rose $82 million, or 7%, year on year. Net fuel contributed $77 million year on year, while gains from property sales fell from $85 million last year to approximately $1 million, creating a $84 million drag. The two effects largely offset each other, indicating an improvement in underlying profitability as well. However, employee compensation and benefits expenses were $14 million above the firm’s forecast, and average headcount rose approximately 1% from the previous quarter.
Why does the firm remain relatively positive as full-year expenses rise to $9 billion?
The company raised its 2026 adjusted operating expense guidance from $8.8 billion–$8.9 billion to approximately $9 billion, entirely due to fuel: incremental fuel costs relative to the original guidance rose from $400 million–$500 million to $700 million. Excluding this component, cost guidance was reduced by approximately $100 million, even as it assumed higher volumes.
The new guidance implies fourth-quarter operating expenses of approximately $2.37 billion, about 2% above market expectations. Bernstein attributes this mainly to diesel prices rising from the third-quarter average and expects the cost to be recovered through fuel surcharge revenue; this is also key to why the increase in expenses did not translate directly into equivalent pressure on profit.
Capital expenditure guidance was also raised from $1.9 billion to approximately $2.1 billion, implying full-year capital investment above the previous plan.
Which operational changes support the 2027 earnings outlook?
The company raised its full-year coal market outlook from mixed to positive, with demand improving among both export and utility customers, while its outlook for merchandise and intermodal was unchanged. It also removed last quarter’s warning that the merger announcement was weighing on volumes, and the year-on-year comparison effect caused by BNSF rerouting is gradually fading. Bernstein accordingly raised its assessment of volumes and business mix slightly.
Service recovery remains a constraint. Following flood damage, the intermodal composite service metric stood at 84%, and the merchandise transportation plan execution rate was 74%. Although both improved quarter on quarter, they remained below the 92% and 80% recorded in the same period last year.
Taking the quarter’s performance together, Bernstein believes the Bloomberg consensus for 2027 of adjusted earnings per share of $14.27 and operating profit of $4.8 billion is achievable, and expects market earnings forecasts to be revised upward. The firm rates the stock Outperform, with a target price of $396.
