(Reuters) - Shares in Norfolk Southern Corp (NSC.N) rose about 5 percent in early trading on Wednesday after the fourth-largest U.S. railroad reported a 27 percent increase in year-over-year quarterly net profit and topped revenue forecasts.
The Norfolk, Virginia-based railroad, with a network that spans 22 states across the eastern United States, said its results were fueled by higher volumes and freight rates and a lower effective tax rate.
Norfolk Southern has benefited from one of the tightest trucking markets in years, which has caused shippers to move freight to rail to find capacity and cheaper prices.
“We’re seeing some of the strongest volumes that we’ve seen on our network, really in over 10 years right now,” chief executive officer Jim Squires told analysts on a conference call.
Despite the beat, the railroad said it was working to fix service issues that led to higher expenses and persistent customer complaints in the past few months.
Norfolk Southern and other major railroads such as rival CSX Corp (CSX.O) and Union Pacific (UNP.N) are facing scrutiny from the top federal rail regulator over delays and crew and rail car shortages.
Norfolk Southern said it was hiring more workers and temporarily leasing locomotives to alleviate delays, although its overall headcount was flat year-over-year.
Its operating ratio, a closely watched measure of operating costs as a percentage of revenue, rose to 69.3 percent from 67.4 percent in January, though it was down from 70.6 percent in the same quarter a year ago. A lower operating ratio shows improvement in profitability.
The railroad struggled to reign in expenses, which increased 4 percent to $1.9 billion from the year-ago period, although higher fuel prices and costs from slower train speeds were partly offset by efficiency gains.
Quarterly revenue increased 6 percent to $2.7 billion from the first quarter of 2017, driven by a 3 percent rise in overall cargo volumes. Consumer goods grew 8 percent, which offset declines in merchandise and coal volumes.
Analysts expected $2.68 billion in revenue.
Norfolk Southern said first-quarter net income rose to $552 million, or $1.93 cents per share, from $443 million, or $1.48 per share a year earlier.
The railroad said it was increasing its expected annual share repurchases to $1.5 billion for 2018.
Reporting by Eric M. Johnson in New York; Editing by Jeffrey Benkoe and Bill Trott