Surprise Surprise

Southern Comfort. Shares of Norfolk Southern (NYSE: NSC) rose to $78.21 on July 27—a record high for the rail freight transporter’s stock—after the company announced strong second-quarter results. Net profit rose 42 percent year over year to a record $557 million. Revenue rose to $2.8 billion from $2.4 billion the previous year, another record for the company.

Higher gas prices and limited truck capacity boosted rail shipments across the industry, and Norfolk Southern saw its second-quarter shipment volume increase 4 percent. New pricing structures boosted total revenue by 18 percent. Revenue from coal transportation rose 28.3 percent, intermodal revenue increase 19.7 percent and general merchandise revenue rose 11.7 percent during the quarter.

Since 2007, Norfolk Southern has repurchased 75 million shares. Consequently, the company’s earnings per share (PES) rose 50 percent to a record $1.56.  On July 26, the company announced a plan to buy back an additional 50 million shares by Dec. 3, 2014. The company currently has 347.7 million outstanding shares.

Norfolk Southern’s board recently approved a per-share dividend increase of $0.03 on top of the current dividend yield of $0.43. The company’s dividend has more than doubled during the past five years and Norfolk Southern has paid a dividend for 116 consecutive quarters. Analysts expect Norfolk Southern’s full-year EPS to rise 28 percent to $5.10.

Who’s Buying What

Health Scare. Analysts at Stifel Nicolaus upgraded shares of managed health care company Amerigroup (NYSE: AGP) to “buy” from “hold” on Aug. 2 after the company won a Medicaid contract extension in Texas. The Virginia Beach-based company serves about 1.9 million individuals who receive benefits from publicly funded health care programs. Amerigroup provides health care to about 600,000 members in the Lone Star State—its largest market—and expects to expand its business in the Austin, El Paso and Lubbock areas. Amerigroup shares rose about 6 percent to $51 following the upgrade.

Amerigroup’s net income declined to $44.3 million from $67.2 million in the second quarter due to a one-time “retroactive premium adjustment” in Georgia. Duplicate records caused the state to overpay the company and the premium adjustment eroded Amerigroup’s second-quarter earnings per share (EPS) by $0.16. Second-quarter EPS came in at $0.99 missing consensus estimates by $0.13. The earnings miss caused Amerigroup’s stock to plummet 18 percent to about $55.

Stifel Nicholus upgraded the stock despite Amerigroup’s disappointing second-quarter results on the belief that analysts had unrealistic expectations for the company’s quarterly earnings. The company also has additional avenues for growth. In late July, Louisiana’s Department of Health and Hospitals named Amerigroup as a candidate to coordinate services for about 900 Medicaid recipients in the state.

The Checkup

Ahead of the Game. In July 2010, Michael Sansoterra, portfolio manager of RidgeWorth Large Cap Growth (STCIX) profiled two companies he believed would beat analysts’ expectations. Here’s a look at how his recommendations fared.

Union Pacific Corp’s (NYSE: UNP) principal operation, Union Pacific Railroad, is the nation’s largest railroad company. Union Pacific is running on a full head of steam in 2011; management said the second quarter delivered the “best-ever quarterly earnings” despite severe flooding in the Midwest. Net income rose 10 percent year over year to $785 million, while revenue increased 16 percent to $4.8 billion.

CEO Jim Young expects the company to perform strongly in the second half of the year despite economic uncertainty. Although debate in Washington over the US debt ceiling affected shipping in July, volumes are likely to rise due to strong crop harvests and rising demand for coal. The company also may increase prices on some expired contracts. Union Pacific’s stock has returned 35.3 percent since Sansoterra’s recommendation.

China’s leading Internet search provider Baidu (NSDQ: BIDU) controls about 76 percent of the country’s online search market. The company’s second-quarter earnings rose by 95 percent year over year to RMB1.6 billion (USD252.6 million) on the back of strong spending by advertisers. The number of advertisers rose 19 percent in the quarter to 298,000. sales surged by 78 percent to RMB3.4billion (USD528.4 million).

China has the world’s largest Internet market with 450 million users. Analysts say this figure could grow to 600 million in several quarters as millions of rural residents migrate to urban areas. Although Baidu’s stock trades at 62 times earnings, the company’s shares have consistently outperformed those of its peers. Baidu’s shares have gained 105.7 percent since last July.