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Kansas City Southern (KSU - Analyst Report) reported third quarter 2012 adjusted earnings per share of 82 cents, missing the Zacks Consensus Estimate of 84 cents. However, the earnings figure grew 5.1% year over year from 78 cents, driven by strong growth in Intermodal and Automotive segments.

Quarterly total revenue was $577 million, up 6% year over year, but came below the Zacks Consensus Estimate of $578 million. The year-over-year increase was primarily attributable to strong revenue growth in Automotive and Intermodal segments.

In the third quarter, adjusted operating income was $181 million, up 16.0% year over year on a 260 basis point (bps) improvement in adjusted operating ratio (defined as operating expenses as a percentage of revenue) to 68.7%.

Segment Results

In the third-quarter, Chemical & Petroleum accounted for $106.4 million of total revenue, up 4% year over year while volumes declined 3% year over year. Revenue per unit was $1,694, up 6% year over year.

Industrial & Consumer products accounted for $138.0 million, up 1% year over year. Business volume was 83,500, down 1% year over year. Revenue per carload was $1,614, up 2% year over year.

Agriculture & Minerals accounted for $90.7 million, down 10% year over year. Business volume was 5,020, down 12% year over year. Revenue per carload was $1,807, up 3% year over year.

Energy accounted for $89.3 million, up 8% year over year. Business volume was 82,500 up 3% year over year. Revenue per carload was $1,082, up 5% year over year.

Intermodal accounted for $82.4 million, up 25% year over year. Business volume was 243,300, up 17% year over year. Revenue per carload was $337, up 7% year over year.

Automotive accounted for $48.2 million, up 31% year over year. Business volume was 28,100, up 31% year over year. Revenue per carload remained unchanged year over year at $1,715.

Quarterly Other revenue was $22.8 million, up 19% year over year.

Liquidity Position

The company exited the third quarter of 2012 with cash and cash equivalents of $187.0 million, compared to $217.1 million in third quarter of 2011. Long-term debt was $1.56 billion compared with $1.60 billion in 2011.

Our Analysis

Despite the economic volatilities, we believe Kansas City Southern remains poised to gain from its key growth drivers like automotive, cross-border intermodal, freight business at Lázaro Cárdenas, crude oil and frac sand that collectively marked 18% of the company’s freight business in the third quarter.

Additionally, the company’s productivity initiatives and efficient cost control are expected to drive operating performances over the long term.

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), in addition to capital intensive nature of business, unionized workforce and stringent railroad regulations.

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

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