Despite derailment shock, NS shareholders will be OK, analysts say

February 15, 2023

The analysts and financial pundits seem to have already spoken, pronouncing that Class I Norfolk Southern (NS) and its shareholders are going to be just fine in the aftermath of the East Palestine, Ohio, derailment. The experts have let us all know that what could turn out to be the largest domestic environmental disaster of our young decade won’t actually be that big of a hit for the Class I carrier.

In an article published Feb. 14 by FreightWaves, the publication stated that it estimates NS will “only” end up spending $40 million to $50 million to cover its liabilities for the derailment. Though this number is substantial when viewed against the backdrop of East Palestine’s $46,436 median household income and $88,600 median property value, the estimated price tag only amounts to 1.7% of the railroad giant’s net profits in 2022.

Based on industry standards for such incidents (this isn’t the first time a railroad disaster has spoiled the environment of a town and surrounding areas), the article estimates that any financial setback to the company and investors as a result of the Feb. 3 disaster will be overcome by May.

“As a rail service is restored, rail shares have historically not seen a material impact from accidents on a three-month horizon.” Ken Hoexter of Bank of America was quoted in the article.

Incidents of the magnitude of what happened in Ohio have the ability to alter the lives of thousands of people who live in communities near rail tracks, yet here, again, we see that they do not serve as much more than a slight dip in the quarterly lap around the corporate speedway to more profits. This is a less than encouraging reality. It begs the question whether there’s any tangible motivator for Norfolk Southern or the other Class I freight railroads to do better than simply mouthing “safety is our top priority” when the financial hit is brushed away like a piece of lint. The residents of the affected area? Well, they have to cope with the stress of homes and property tainted by chemical fallout and the anxiety of not knowing whether there will be long-lasting ramifications to their general physical and mental health as a result of the disaster while the legal wrangling occurs.

As the article in FreightWaves points out, NS had a similar derailment in 2005 in Graniteville, S.C. There, the carrier was found to be liable for 550 people being admitted to hospitals with respiratory issues, and nine deaths due to the release of chlorine. NS paid out $39 million between expenses and penalties. This resulted in a mere 1.7 percent decrease in its operating ratio for a single quarter. The financials of the company, including its stock prices, had entirely recovered by the end of that year, the article said.

While the benefits reaped by carriers seeming “too big to fail” works out just fine for the shareholders, rail labor has to cope with job cuts and compensate at an operational level for the decisions of Class I management. It’s our members who know they are being pushed to operate questionable equipment subject to relaxed safety inspections. Our men and women have front-row seats to watch the hedge fund profit-first mentality that fuels Precision Scheduled Railroading as it rots out our industry. Many workers have had the thought or have said to a manager that cultural shifts away from proper inspections and maintenance were going to create disasters like we saw in East Palestine. It turns out that we were right, but so were they in thinking the PSR playbook is still profitable, even with the occasional disaster baked into the cake. Until these carriers are financially unable to recover so quickly from these catastrophes, they have no reason to increase staffing and get back to a safety-focused culture.

So if history holds, analysts suggest, the temporary price drop in NS stock should actually be viewed as a rebound opportunity. Savvy investors could buy into the company on the cheap now, then reap the rewards when it bounces back. It’s a dark and chilling commentary on an eventual return to business as usual within months of East Palestine’s nightmare. Yet the recovery for the village’s about 4,500 residents will take substantially longer.

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