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Kansas City Southern (KSU - Analyst Report) reported fourth quarter 2013 adjusted earnings of $1.03 per share, missing the Zacks Consensus Estimate of $1.10. However, adjusted earnings increased 12% from 92 cents in the year-ago quarter on higher revenues.

Total revenue was $616 million in the fourth quarter, up 8% year over year but below the Zacks Consensus Estimate of $622 million. The year-over-year increase was primarily attributable to solid revenue growth in the Intermodal segment and Agriculture & Minerals.

For the full year, the company reported adjusted earnings per share of $3.98, up from $3.43 in 2012. Revenues increased 6% year over year to $2,369.3 million.

In the fourth quarter, operating income was $196 million, up 13% year over year. Operating ratio was 68.1%, reflecting an improvement of 140 basis points year over year. In 2013, adjusted operating income rose 10% year over year to $738.6 million. For 2013, operating ratio was 68.8%, representing an improvement of 110 basis points year over year.

Segment Quarterly Results

Chemical & Petroleum segment contributed $105.8 million in revenues, up 2% year over year. Volume was down 4% year over year. Revenue per unit grew 6% year over year.

Industrial & Consumer Products generated revenues of $149.5 million, up 9% year over year. Business volume grew 1% year over year. Revenue per carload was up 7% year over year.

Agriculture & Minerals segment revenues were $119.1 million, up 30% year over year. Business volume grew 23% year over year. Revenue per carload also rose 5% year over year.

Energy segment generated $70.4 million in revenues, down 17% year over year. Business volume dipped 10% year over year. Revenue per carload was also down 7% year over year.

Intermodal segment revenues were $94.4 million, up 18% year over year. Business volume rose 3% year over year. Revenue per carload grew 14% year over year.

Automotive segment accounted for $53.5 million of the total revenue, up 9% year over year. Business volume grew 3% year over year. Revenue per carload rose 6% year over year.

Quarterly Other revenues were $22.9 million, up 7% year over year.

Liquidity Position

The company exited the year with cash and cash equivalents of $429.5 million compared with $72.6 million in 2012. Long-term debt increased to $1,856.9 million from $1,547.6 million in 2012. The company had free cash flows of $105.6 million at the end of 2013 compared with $58.1 million in 2012. 

Capital expenditures for 2013 amounted to $594.8 million compared with $517.1 million for 2012. 

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 ensure the achievement of growth goals.

However, we remain cautious on the stock due to competitive pressure, a unionized workforce, heavy investments and increased railroad regulation. Additionally, the ongoing uncertainties in Coal and a competition from other carriers like Canadian National Railway Co. (CNI - Analyst Report), Norfolk Southern Corp. (NSC - Analyst Report) and Canadian Pacific Railway (CP) may also pose significant headwinds to the company’s growth.

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

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