March 5, 2024

Norfolk Southern fires back at Ancora, gets Wall Street analyst’s support


The sparring over the future of Norfolk Southern continues, with the railroad offering a detailed defense of its operations alongside a critique of Ancora Holdings’ recently renewed call for a quick change in management following a derailment late last week.

In the middle of the maelstrom at Norfolk Southern (NYSE: NSC), a leading Wall Street investment bank said the company’s finances were strong enough to increase its rating. The report from the transportation research team at UBS led by Thomas Wadewitz, moving its rating to Buy from Neutral, helped push the stock price Monday to a level just below NS’ 52-week high.

Norfolk Southern shot back at activist investor Ancora on Monday with a prepared statement that was aimed at, as the release’s headline said, correcting “false and misleading claims.”

The railroad’s statement focused on two charges leveled by Ancora in back-to-back statements released Friday and Saturday. Friday’s statement focused on the pay package of Norfolk Southern CEO Alan Shaw, which was made public in the railroad’s proxy statement filed with the Securities and Exchange Commission last week.

The second came after the derailment of several cars of a Norfolk Southern train in Lower Saucon Township in Pennsylvania, in the Allentown-Bethlehem area, that spilled diesel fuel and plastic pellets into the Lehigh River.

The Ancora statements could be boiled down to two key themes: For a railroad with safety issues, such as the East Palestine, Ohio, derailment last year, Shaw makes too much money; and the Pennsylvania derailment is another sign of lax safety at NS, demonstrating that Shaw should be replaced immediately.

Norfolk Southern said Ancora was “misrepresenting our safety record.” The railroad is taking the Pennsylvania derailment “seriously” but said it had resulted in “no harm to the community and no hazardous material concerns from the railcars.”

The railroad’s “mainline accident rate” was down 42% in 2023 compared to 2022, the statement said, and “the company’s … rate is the lowest it has been in years and is among the best of the North American Class 1 rails.”

The NS statement ticked off multiple points in defense of steps it had taken for a safer railroad.

The list included “enhanced employee training” and being the first Class 1 railroad to join the Federal Railroad Administration’s Confidential Close Call System. Norfolk Southern said it had hired Atkins Nuclear Secured as an independent safety consultant. “They have conducted a comprehensive safety assessment, and we are implementing changes based on their recommendations,” the railroad said.

Defending Shaw’s pay

It then shifted gears in its statement to defending Shaw’s pay package that exceeded $13.4 million in 2023, significantly higher than 2022 compensation of $9.8 million.

Among the defenses of the pay package:

  • It did not reach that maximum levels that it could have. There were incentives that the board decided should not be paid out to Shaw or other executives. 
  • It was adjusted so that insurance payouts as a result of the East Palestine derailment didn’t impact the level paid.
  • The comparison to 2022 is unfair because Shaw didn’t become CEO until May 2022.

Ancora is recommending that NS shareholders approve a slate of eight independent directors who have vowed to install former UPS executive Jim Barber Jr. as CEO and former CSX executive Jamie Boychuck as COO. Norfolk Southern has recommended that shareholders approve the 13 candidates for the board it has recommended. The annual meeting is May 14.

UBS sees merchandise growth

The UBS report didn’t mention the proxy fight by Ancora at Norfolk Southern. The increase in the rating to Buy was driven primarily by UBS’ optimism about the prospects for the railroad’s merchandise business.

Norfolk Southern’s operating ratio in its merchandise business, which UBS estimates was 65% in 2023, could improve to 55% by 2026, according to the report. Merchandise is rail business that isn’t coal or intermodal.

CSX (NASDAQ: CSX), the Class 1 competitor for Norfolk Southern in the eastern U.S., moves about 30% more carloads per train in its merchandise activities, according to UBS.

“If NSC bridges the gap with CSX on this metric, it would translate to a 20% reduction in merchandise train starts, which is a key driver of cost on a railroad,” UBS wrote. “We conclude that lower [train and engine] crew expense from reduced starts would result in about 400 basis points of margin improvement in NSC’s merchandise segment.” That also has a knock-on effect of reductions in other expenses, which would add several hundred more basis points in cost reductions, UBS added.

Norfolk Southern stock closed Friday at about $257.50. It rose to a Monday close of $259.17 after the UBS report was published.

The railroad’s 52-week high was set Feb. 21 at $261.37. Its 52-week low was in October at $183.09. In trading Tuesday, the stock closed at $257.42, down $1.75 or 0.68%..

UBS has a new 12-month price target on Norfolk Southern of $302. Its previous target was $238.

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