Norfolk Southern Corp.’s top executive was dragged before Congress a second time this week to answer for the train crash and chemical spill that forced the temporary evacuation of a small Ohio town last month.
(Bloomberg) — Norfolk Southern Corp.’s top executive was dragged before Congress a second time this week to answer for the train crash and chemical spill that forced the temporary evacuation of a small Ohio town last month.
Despite the political uproar, many industry watchers say it’s increasingly likely the railroad operator will face few financial penalties. Even the threat of more federal regulation wouldn’t affect Norfolk Southern any differently than its peers.
That message has been slow to resonate on Wall Street, where Norfolk Southern shares have lost a fifth of their value since the accident, a significant drop in the typically staid industry.
“The share reaction to the derailment has been a complete overreaction,” said Jason Seidl, an analyst with TD Cowen, in an interview. “In the long run, Norfolk and the other rails are expected to see strong growth. So, if you are a long-term investor, this is a buying opportunity.”
Norfolk Southern has been the target of withering criticism after a 149-car train derailed on Feb. 3 in East Palestine, Ohio, dumping ethylhexyl acrylate, isobutylene and other chemicals into soil and local waterways. The damage was exacerbated after authorities decided to vent and burn five railcars containing vinyl chloride on Feb. 6 out of concern that the contents were heating up and could explode. Still, the derailment caused no fatalities nor direct injuries, which would have escalated the severity.
The Atlanta-based railroad has insurance that will cushion the blow of remediation expenses, which include $24 million spent so far to support local residents whose jobs were disrupted. Bloomberg Intelligence estimates Norfolk Southern will spend somewhere between $150 million and $250 million fixing the mess, a majority of which may be the actual cleanup. Environmental fines for similar accidents have been in the multimillion-dollar range. Ohio has sued the company seeking unspecified damages but that isn’t expected to add significantly to costs.
If insurance coverage applies, Bloomberg Intelligence estimates the total hit to Norfolk Southern’s earnings per share would be just 25 cents this year, or less than 2%. Norfolk Southern’s operating profit was $4.8 billion in 2022.
“Over the next six to nine months, people are going to evaluate Norfolk’s stock on the fundamentals and I don’t think this unfortunate event is part of the fundamental story of the company,” said Amit Mehrotra, an analyst with Deutsche Bank.
The disconnect between the market’s reaction and analysts’ appraisal of the derailment can be partly explained by videos of smoke billowing from the wreckage that went viral after the accident, sparking national news coverage and outrage on social media. US political polarization, which has grown more extreme since the 2016 election, further fueled the flames as lawmakers competed to condemn the incident and highlight the plight of forgotten folks in rural Ohio.
To get ahead of lawmakers, Norfolk Southern committed to a six-point safety plan that includes adding hundreds of heat sensors alongside rail tracks. CEO Alan Shaw told a Senate committee on March 22 that the company supports more regulation, including higher standards on tank cars, a review of safety measures every three years, and providing first responders with more information on the contents of trains passing through their communities. The company has also made unprecedented pledges to reimburse lost property value related to the derailment and to set up a long-term medical fund.
Those pledges and Shaw’s public apologies have defused calls for him or any other executives to step down in the wake of the accident.
“I’m terribly sorry for the derailment in East Palestine and we’re working every day to make Norfolk Southern and the rail industry safer,” Shaw told lawmakers. “Norfolk Southern is here for the long haul and we won’t be finished until we make this right.”
The long-term initiatives will drive up Norfolk Southern’s costs and weigh on earnings, according to John Eade, an analyst at Argus Research. Cargo volumes will be curtailed as the railroad rips up track on its mainline that passes through East Palestine to remove contaminated soil underneath. That work, which will be done on one of the two sets of tracks at a time to keep trains moving, will take about eight weeks to complete, Norfolk Southern has said.
“They will struggle with earnings growth for pretty much the rest of the year,” Eade said in an interview. Earlier this month he cut his rating on Norfolk Southern shares to hold from buy, the only downgrade so far since the accident.
Federal regulators have also opened broader investigations into the company’s culture and safety practices following a series of recent incidents involving the railroad.
Trains derail about 1,000 times a year in the US, which is half the rate from two decades ago. In particularly bad crashes, including fatal ones, any impact on the stock price has usually disappeared within a year. That was the case in 2005 when two Norfolk Southern trains collided and released chlorine gas in Graniteville, South Carolina, killing nine people. Shares of CSX Corp. were only temporarily impacted in 2014 when a train spilled oil in downtown Lynchburg, Virginia, causing a fire and partial evacuation. And Union Pacific Corp.’s shares were outperforming the broader market a year after a collision near San Antonio released chlorine gas and killed three people, including the train’s conductor.
These incidents, like the one in East Palestine, spurred calls for more oversight. Historically the costs to implement new safety measures have been shared among all railroads, not just the company with the most recent accident. In some cases, it’s been the tank-car makers and shippers that have borne the brunt of the expenses, rather than the railroads.
History also shows that demand for rail isn’t affected by accidents. There’s no better way to haul chemicals or other bulky goods since trains are much safer than trucks and emit a fraction of the greenhouse gases. Norfolk Southern operates in the eastern U.S. and has only one major competitor, CSX.
Austin Graff, founder and chief investment officer at Opal Capital, says railroads are generally considered to be high-quality businesses, and occasional fines and minor regulatory changes are to be expected. Neither will put Norfolk Southern out of business, he said.
“Many value investors prefer to buy into bad news situations, understanding that the current perception is likely transitory,” Graff said. “When the narrative improves the company will likely trade much higher.”
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