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UPDATE 1-Norfolk Southern 3rd-qtr profit rises but shares fall

(Adds analyst comments, statements from conference call)

Oct 25 (Reuters) - Norfolk Southern Corp reported a higher quarterly profit on Wednesday, but shares of the No. 4 U.S. railroad fell more than 3 percent on concerns over rising compensation and the view its results were propped up by land sales.

The company saw higher fuel and compensation costs in the quarter despite headcount reductions, and declined to detail the financial toll from a September hurricane that disrupted service in the U.S. Southeast.

"It didn't look like a clean beat as one-time items distorted the bottom line," said Chris Horan, a transport specialist with Stifel. "The stock also had a nice run into earnings so not shocked to see pullback."

Norfolk Southern shares were down about 3.2 percent at $128.12 in mid-afternoon trading on Wednesday.

The Norfolk, Virginia-based railroad reported a best-ever quarterly operating ratio, a measure of operating expenses as a percentage of revenue. The metric declined to 65.9 percent in the quarter, an improvement of 1.6 percentage points over the year-ago period.

Third-quarter net income rose to $506 million, or $1.75 per share, from $460 million, or $1.55 a share, a year earlier. Analysts expected $1.64, according to Thomson Reuters I/B/E/S.

Operating expenses rose by 3 percent from a year ago to $1.8 billion. Despite its reductions in overall headcount, pay and benefits were up 9 percent, driven by higher incentive compensation and inflation-linked increases in healthcare and wages.

Those increases were offset by cost-cutting and the sale of property, the company said.

"NSC actually missed the quarter when adjusting for the impact of land sales," said Morgan Stanley analyst Ravi Shanker.

The railroad moved 4 percent more volume in the quarter with 4 percent fewer employees, it said.

Alan Shaw, Norfolk's chief marketing officer, told analysts the company sees opportunities to take business from trucking firms into 2018 amid tightening capacity. The company has also pulled some business from rival CSX, which has been grappling with service disruptions.

Volumes of coal were up 12 percent and intermodal freight - containers that can be transferred between ships, rail, and trucks - rose 4 percent overall to an all-time record quarterly volume, even though its international business was down slightly due to hurricane disruptions.

Coal freight volumes have recovered slightly in 2017 after two years of precipitous declines.

Norfolk Southern last year unveiled a strategic plan that aims to increase cost savings to over $650 million by 2020 from $130 million in 2016. (Reporting by Eric M. Johnson in Seattle; editing by Matthew Lewis and G Crosse)