Kansas City EPS Rise on Record Revs

Kansas City Southern (KSU - Analyst Report) reported fourth quarter 2012 adjusted earnings of 92 cents per share, breezing past the Zacks Consensus Estimate of 83 cents. Adjusted earnings increased 19.5% from 77 cents in the year-ago quarter driven by higher freight rates and volumes.

Adjusted earnings for the fourth quarter excluded the impact of 9 cents per share of unfavorable special items related to income tax, adjustment for debt retirement costs and foreign exchange.

For the full year, earnings per share rose 14.3% year over year to $3.43.

Quarterly total revenues were $568.4 million in the fourth quarter, up 7.2% year over year and in line with the Zacks Consensus Estimate. The year-over-year increase was primarily attributable to a 2% growth in carloads. For full-year 2012, revenues were $2.2 billion, up 6.7% year over year. Carloads registered an increase of 5% year over year.

In the fourth quarter, operating income was $173.6 million, up 15.4% year over year. This resulted in an operating ratio of 69.5%, up 210 basis points year over year. Operating income for 2012, increased 14.8% year over year to $672.9 million. Operating ratio for the year was 69.9%, which improved 220 basis points year over year.

Segment Wise Quarterly Results

Chemical & Petroleum segment contributed $104 million in revenues, up 14% year over year. Volume was 6,160, up 5% year over year. Revenue per unit came in at $1,688, up 8% year over year.

Industrial & Consumer Products generated revenues of $137.3 million, up 11% year over year. Business volume was 81,900, up 6% year over year. Revenue per carload was $1,676, up 5% year over year.

Agriculture & Minerals segment revenues were $91.9 million, down 11% year over year. Business volume was 50,800, down 14% year over year. Revenue per carload was $1,809, up 3% year over year.

Energy segment generated $84.6 million in revenues, down 1% year over year. Business volume was 74,100, down 11% year over year. Revenue per carload was $1,142, up 11% year over year.

Intermodal segment revenues were $80.0 million, up 14% year over year. Business volume was 234,800, up 7% year over year. Revenue per carload was $341, up 8% year over year.

Automotive segment accounted for $49.1 million revenues, up 33% year over year. Business volume was 28,500, up 21% year over year. Revenue per carload was $1,723, up 10% year over year.

Quarterly Other revenues were $21.5 million, up 8% year over year.

Liquidity Position

The company exited 2012 with cash and cash equivalents of $72.6 million compared with $72.4 million in 2011. Long-term debt increased to $1,547.6 million from $1,602.8 million in 2011. The company had free cash flows of $35.2 million at the year-end 2012 compared with $174.6 million in 2011.

Capital expenditures for the year amounted to $540 million compared with $495 million a year ago.

Other Railroad Stocks

Over this week, we expect fourth quarter results from another railroad company – Union Pacific Corporation (UNP - Analyst Report). The company is slated to release its earnings on Jan 24, 2013. The Zacks Consensus Estimates for the fourth quarter and 2012 earnings currently stand at $2.16 per share and $8.25 per share, respectively. The estimates reflect a respective year-over-year growth of 8.7% and 22.7% for the fourth quarter and 2012.

Other stocks worth considering within the sector are Genesee & Wyoming Inc (GWR - Snapshot Report) that holds a Zacks Rank #1 (Strong Buy) and American Railcar Industries (ARII - Snapshot Report) that carries a Zacks Rank #2 (Buy).

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 of the company.

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 and a competitive market may also pose significant headwinds for the company.

Kansas City Southern retains a Zacks Rank #4 (Sell).