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Kansas City Southern (KSU - Analyst Report) reported second quarter 2013 adjusted earnings of 96 cents per share, beating the Zacks Consensus Estimate by a penny. Adjusted earnings increased 9% from 88 cents in the year-ago quarter driven by higher freight rates and volumes.

Adjusted earnings excluded the impact of 82 cents per share of special items related to unfavorable adjustment for debt retirement costs and foreign exchange loss as well as a favorable adjustment related to foreign exchange component of income taxes.

Total revenue was $579.3 million in the second quarter, up 6% year over year and in line with the Zacks Consensus Estimate. The year-over-year increase was primarily attributable to 3% growth in carloads and solid revenue growth in the company’s Energy segment.

Operating income was $179 million, up 12% year over year. This resulted in operating ratio of 69%, improved 150 basis points year over year. The improvement was driven by higher revenues, mid single-digit growth in pricing and cost control.

Segment Wise Quarterly Results

Chemical & Petroleum contributed $109 million to revenues, up 11% year over year. Volume was up 2% year over year. Revenue per unit grew 9% year over year.

Industrial & Consumer Products generated revenues of $142.1 million, up 4% year over year. Business volume remained almost flat year over year. Revenue per carload was up 4% year over year.

Agriculture & Minerals revenues were $86.7 million, down 18% year over year. Business volume was down 13% year over year. Revenue per carload also dipped 6% year over year.

Energy generated $85.3 million in revenues, up 26% year over year. Business volume rose 12% year over year. Revenue per carload was also up by 12% year over year.

Intermodal revenues were $86.6 million, up 13% year over year. Business volume rose 5% year over year. Revenue per carload grew 8% year over year.

Automotive accounted for $47.5 million revenues, up 20% year over year. Business volume was up 7% year over year. Revenue per carload rose 12% year over year.

Quarterly Other revenues were $22.1 million, up 9% year over year.

Liquidity Position

The company exited the second quarter with cash and cash equivalents of $30.0 million compared with $72.6 million in 2012. Long-term debt increased to $1,765.7 million from $1,547.6 million in 2012. The company had free cash flows of $13.5 million at quarter end, compared with $76.8 million in the corresponding quarter a year ago.  

Capital expenditures for the quarter amounted to $265.9 million compared with $195.2 million a year ago.

Recommendation

We believe Kansas City Southern remains well positioned to reap benefits from the ongoing strong pricing trend. The company’s productivity initiatives and efficient cost control measures are expected to drive operating performance over the long term. Further, strategic investments in infrastructural development will help the company to achieve its growth goals.

However, we remain cautious on the stock due to competitive pressures, a unionized workforce, heavy investments and increased railroad regulation. Additionally, the ongoing uncertainties in the coal and agriculture industries may also pose significant headwinds for the company.

Kansas City Southern retains a Zacks Rank #3 (Hold).

Other Railroad Stocks

Second quarter results from other railroad companies – Canadian National Railway Company (CNI - Analyst Report), Norfolk Southern Corp. (NSC - Analyst Report) and Canadian Pacific Railway Limited (CP - Analyst Report) – are slated for release next week. The Zacks Consensus Estimate for the second quarter currently stands at $1.58, $1.50 and $1.48 per share for Canadian National, Norfolk Southern and Canadian Pacific, respectively.
 

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