What stands out

Norfolk Southern’s capital spending declined while its operating cash flow dropped at a faster rate. Capital spending fell 0.7% over the period, whereas operating cash flow fell 11.0%. This disparity means less of the cash generated remained after investment.

Revenue growth outpaced profit growth, causing the operating margin to compress. Revenue increased 6.0% year over year, but the operating margin fell 5.7 percentage points. Sales are rising faster than the profit derived from them.

Growth and profit

The company’s profitability metrics show a decline in margins despite revenue growth. The trailing operating margin stood at 31.5%, down 5.7 percentage points from a year earlier. The trailing net margin was 20.7%.

Net income decreased over the twelve-month period. Net income was $2.68 billion, which fell 9.4% on the year before. This decline occurred even as revenue rose 6.0%.

Cash flow

Operating cash flow decreased while capital spending remained relatively stable. Operating cash flow over the twelve months was $3.78 billion, down 11.0% on the year before. Capital spending was $2.14 billion, representing 16.5% of revenue.

Free cash flow fell more sharply than operating cash flow. Free cash flow, calculated as operating cash flow less capital spending, was $1.65 billion, down 21.5% on the year before. The free-cash-flow margin was 12.7% of revenue, down 4.5 percentage points from a year earlier.

The average diluted share count experienced a slight reduction. The average diluted share count fell 0.3% over the year.

In context

Current performance metrics sit within the company’s historical range. Today’s free-cash-flow margin of 12.7% is higher than 50% of the company’s own past quarterly readings. These past readings have ranged from 1.8% to 25.0%.

The operating margin is also positioned in the upper half of historical data. Today’s operating margin of 31.5% is higher than 61% of the company’s own past quarterly readings. These past readings have ranged from 19.6% to 41.5%.

Revenue growth is above the median of historical performance. Today’s twelve-month revenue growth rate of 6.0% is higher than 66% of the company’s own past quarterly readings. These past readings have ranged from −13.9% to 19.8%.

What it means for value

Our model shows high sensitivity to changes in growth assumptions. In our model, growth 5 percentage points lower would lower the value by 36.6%. Conversely, growth 5 percentage points higher would raise it by 47.8%.

A free-cash-flow margin 1 percentage point lower would lower the value by 8.4%.

What to watch

The next filing will reveal whether the divergence between revenue growth and margin compression continues. Investors should look for changes in the operating margin relative to the 6.0% revenue growth rate. The trend in free cash flow, currently down 21.5%, will also be a key indicator of cash generation efficiency.