Kansas City Southern ( KSU - Analyst Report ) reported second quarter 2012 adjusted earnings per share of 85 cents, surpassing the Zacks Consensus Estimate by a penny. The earnings figure grew 19.7% year over year from 71 cents, driven by higher freight rates and strong growth in Intermodal and Automotive segments.

Adjusted earnings for the second quarter exclude the impact of 3 cents per share of special items related to adjustment for debt retirement costs and 27 cents related to adjustments for elimination of net deferred liability.

Quarterly total revenue was $545 million, up 2% year over year, but came below the Zacks Consensus Estimate of $590 million. The year-over-year increase was primarily attributable to a 4% growth in carloads.

In the second quarter, adjusted operating income was $161 million, up 6% year over year on 120 basis points (bps) improvement in adjusted operating ratio (defined as operating expenses as a percentage of revenue) to 70.5%.

Segment Results

In the second-quarter, Chemical & Petroleum accounted for $98 million of total revenue, down 7% year over year on 8% decline in volumes. Revenue per unit was $1,609, up 1% year over year.

Industrial & Consumer products accounted for $137.2 million, up 10% year over year. Business volume was 83,600, up 4% year over year. Revenue per carload was $1,641, up 6% year over year.

Agriculture & Minerals accounted for $106 million, down 7% year over year. Business volume was 63,300, down 10% year over year. Revenue per carload was $1,853, up 3% year over year.

Energy accounted for $67.9 million, down 12% year over year. Business volume was 66,100, down 11% year over year. Revenue per carload was $1,027, down 1% year over year.

Intermodal accounted for $76.4 million, up 23% year over year. Business volume was 228,000, up 17% year over year. Revenue per carload was $335, up 5% year over year.

Automotive accounted for $39.6 million, up 15% year over year. Business volume was 24,100, up 18% year over year. Revenue per carload was $1,643, down 2% year over year.

Quarterly Other revenue was $20.2 million, up 18% year over year.

Liquidity Position

The company exited the second quarter of 2012 with cash and cash equivalents of $105.5 million, compared to $72.4 million in 2011 and $156 million in second quarter of 2011. Long-term debt was $1.57 billion compared with $1.60 billion in 2011. The company’s debt-to-equity ratio was 53.5% versus 58% at year-end 2011.

Recommendation

Despite the economic volatilities, we believe Kansas City Southern remains poised to gain from its major product lines like Intermodal and Automotive. Additionally, the company’s productivity initiatives and efficient cost control are expected to drive operating performances over the long term.

Further, strategic investments on infrastructural development will ensure the achievement of long-term growth goals of the company. Management’s efforts to improve its balance sheet strength by reducing debt burden and interest also remain encouraging, making the company attractive for long-term investment.

On the other side, there are several headwinds that challenge the carrier’s growth, such as stiff competition from other class one freight railroads such as Union Pacific Corp. ( UNP - Analyst Report ) and CSX Corp. ( CSX - Analyst Report ) , followed by capital intensive nature of business, unionized workforce and stringent railroad regulation.

We maintain our long-term Neutral recommendation on Kansas City Southern. Currently, it holds a short-term (1-3 months)Zacks #3 Rank (Hold).