No, no, no, it's not wrong that we value the layoffs positively. We shouldn't think the cost takeouts aren't worth something. As heartless as it sounds, if we are going to buy stocks, we need to know that the companies are taking aggressive cost cuts to get where they need to be.
Let's take the giant railroad that is Norfolk Southern's (NSC). Revenues were soft when it reported, down 6%. Who would want any company that has that level of sales decline?
If you listen to the pundits and the wise guys, they would say the only thing that matters is that Norfolk Southern's revenues aren't growing, they are shrinking.
But the company took out $264 million or 13% in expenses. So minus 6, plus 13, and you get a pretty positive earnings pop, a 25% gain to be specific. Now, Norfolk Southern is very shareholder-friendly and, as it pointed out on the call, over the last 10 years the company has returned $15 billion through share repurchases and dividends, and the company announced it was going to buy back $800 million in stock and that it has a steadfast commitment to the dividend.
So the profits are flowing back to you. More important, though, is the future. Right now most of the cargos that Norfolk Southern moves are, well, going south. Chemicals are down 3%. Coal's down 23%. Metals and construction are down 3%. Agriculture and paper and forest products are up 3% and autos have improved 16%. So not all is lost.
But let's overlay what we hear on these with what we know about these industries NSC serves. First, let's take chemicals. We know our feedstock for chemicals, natural gas, is the cheapest in the world with the possible exception of Qatar. So why would you not believe that line can't get better over time? Sure, coal is problematic, down 23% and it has been down for years. But at a certain point, coal's going to be done going down and will be flat. Sure, there won't be any new coal-fired plants built in this country. There will be many more that are retired. Still, though, coal, right now makes up 33% of our power generation. Thirty-three percent. It is not supposed to go much below that for many years. Therefore, writing coal off, as much as you might want to, is just plain foolish. If anything, coal will stop going down and the cost of moving it will have gone down with it.
Agriculture? We are hearing from DuPont (DD) that ag is coming back after a big down cycle. What could that mean for Norfolk Southern? Huge profits. Metals and construction? We are building plenty of new plants in the South and commercial real estate is looking up throughout the area. Reasonably, that might be at a low in the cycle. Intermodal involves shipping tractor trailers from one place to another. The competition is trucks. Have you seen our roads get better over time? We have no infrastructure rebuild going on. I think trains are a better way to move trailers than their namesake trucks. Automotive? I don't see it slowing down any time soon with a fleet that's on average 12 years old.
Now we don't know exactly how much of any of these cargos is going overseas, but we do know that as the dollar gets weaker, the exports are just going to grow as it does.
So what does all that mean to shareholders of Norfolk Southern? Simple: If you get the pickup that I expect in each of the cargo lines, a huge amount of the business the railroad does is going to fall right to the bottom line. The expense structure is lean; the receipts are going to go higher. That's why the stock continues to roar.
And we know from this railroad's shareholder-friendly philosophy you are going to see these gains come to you.
I just picked Norfolk Southern because it is the most stark. I could have picked any of dozens of companies doing the same thing. When business picks up, these expensive stocks are going to look mighty cheap. So I say all aboard, because by the time business comes back this $93 stock will be a heck of a lot higher, even as it has already traveled from $64 just a few months ago.