What the heck happened in March at Norfolk Southern (NSC)? I write that because on March 4, with less than four weeks to go to the quarter, Norfolk Southern spoke at the JPMorgan conference and gave you the story of the quarter: "Strong Start Moderated by Weather."
I guess after last night's preannouncement it's "Weak Finish Made Worse by Weather." You have to reach that conclusion, because in the shortfall announcement NSC cut its earnings to 15% below last year, even as volume was up 2% going into that conference held in the last month of the quarter.
In fairness, the weather definitely put a damper on March. We know that now, and they wouldn't have known that then. And coal, which was 17% of the company's cargo in 2014, definitely nosedived from the minus 7% year over year at the time of the conference. The other culprit, the reduction in the fuel charge, had to be known by the March meeting. I don't see how that couldn't have been calculated by then.
Which brings me to the real point of this preannouncement: if coal were so bad, the company seemed to feel confident going into the last third of the quarter that the other lines of business -- notably the 33% that was industrial and 50% that was intermodal -- were coming in hot; volumes at that moment were 1109.5 units, well ahead of last year's 1084.2 units. Maybe they thought the other lines could mask the 7% shortfall in coal vs. last year at the time of the meeting? Maybe they thought coal could reverse?
Let's go over the cargo types going into that analyst meeting in the first week of March, to see how they were doing at that snapshot of a moment.
Chemicals were up 10% in units going into the conference, cargo, metals and construction were up 9%, intermodal plus 8%, autos, up 2%, agriculture plus 2% and paper plus 1%. Again the 17% of the business was coal in 2014, and it was minus 7% -- the only cargo that was down at that moment. Hard to believe that the 17% could have derailed the 33% that was industrial and 50% that was intermodal so badly.
I am wondering, therefore, whether the last month of the quarter is a harbinger for many of the businesses in the 22 states Norfolk Southern covers with its 20,000 route miles that make up over 65% of U.S. manufacturing and 55% of the nation's energy consumption.
First, is it possible that the March surge in the dollar crushed export coal? It would stand to reason. How about the rapidity of the conversion to natural gas for utilities to meet tougher EPA standards? They go with natural gas shipped by pipeline. If so, that business is permanently lost.
But how about the continuing secular change that is intermodal? Could that 50% of cargos be hurt by a cyclical slowdown? And how about that 33% of the cargo that was industrial, made up of crude oil shipments, natural gas liquids and drilling inputs -- presumably fracking sand -- automotive, and ag and "increased construction" -- the only business line that was mentioned as "increased" in the presentation?
You have to believe that oil and gas liquids aren't coming back with prices this low. Ag prices were plummeting this month, too. Automotive seemed to be good in March, according to the numbers we got from the companies.
You put it all together and you get an image of a pretty intense slowdown. Now, we know that confirms what the Fed says, which for some is more important than the declines, in terms of keeping the Fed on hold. But it also suggests that this giant energy business has been smashed in volume by low prices in a VERY rapid fashion.
So here's my takeaway. While we wade through the earnings for banks, drugs and semiconductors, keep track of the fact that March may have been terrible for a chunk of industry, because there's a vast panoply of products here that couldn't mask the coal slowdown.
To me, it is anything but reassuring for commerce in the U.S., which is why the transports are so important as a barometer for the weather to come.