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Kansas City Southern (KSU) Up 1.7% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Kansas City Southern (KSU - Free Report) . Shares have added about 1.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kansas City Southern due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Kansas City Southern Beats on Earnings in Q3

Kansas City Southern’s third-quarter 2020 earnings (excluding 5 cents from non-recurring items) of $1.96 per share beat the Zacks Consensus Estimate of $1.88. The bottom line also increased year over year despite coronavirus-related woes.
 
Meanwhile, quarterly revenues of $659.6 million lagged the Zacks Consensus Estimate of $662.4 million. Moreover, the top line fell 11.8% year over year due to weak volumes as a result of coronavirus-induced weak demand, lower commodity prices, lower fuel surcharge and currency-related headwinds. Overall carload volumes dipped 4% year over year with declines across majority of the segments.

In the reported quarter, operating income (on a reported basis) declined 3.7% to $271.5 million. Moreover, operating income (on an adjusted basis) fell 7.5% to $272 million. Kansas City Southern’s adjusted operating ratio (operating expenses as a percentage of revenues) improved to 58.8% from 60.7% a year ago. The lower the value of the metric, the better it is. Operating expenses (adjusted) in the quarter declined 14.6% year over year.

Kansas City Southern’s third-quarter performance reflects a significant improvement from the second when volumes declined 21% year over year. Owing to this upturn in financial performance, the company expects to enter into accelerated share-repurchase agreements to buy back shares worth approximately $500 million under its $2 billion share-repurchase program announced in November 2019.

Segmental Details

The Chemical & Petroleum segment generated revenues worth $191.9 million, down 1% year over year. While volumes increased 5% year over year, revenues per carload decreased 6% from the prior-year quarter.

The Industrial & Consumer Products segment’s revenues logged $126.4 million, down 19% year over year. Business volumes and revenues per carload decreased 9% and 10% respectively, on a year-over-year basis.

The Agriculture & Minerals segment’s total revenues decreased 6% to $125.3 million. Business volumes and revenues per carload slipped 3% each on a year-over-year basis.

The Energy segment’s revenues of $46.8 million were down 28% year over year. While business volumes decreased 20% year over year, revenues per carload dropped 10%.

Intermodal revenues were $89.1 million, down 11% year over year. While business volumes inched up 2%, revenues per carload declined 13% year over year.

Revenues in the Automotive segment plunged 25% year over year to $48.5 million. While business volumes fell 18%, revenues per carload declined 9% on a year-over-year basis.

Other revenues totaled $31.6 million, down 6% year over year.

Outlook

The company expects its full-year adjusted earnings to slightly increase on a year-over-year basis. Additionally, adjusted operating ratio is predicted to be at the low end of the 60-61% range in 2020. The company continues to anticipate capital expenditures of $425 million or less in 2020. For the period 2021-2022, capital expenditures are still expected to be roughly 17% of revenues. The company estimates free cash flow to be approximately $550 million in the current year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Kansas City Southern has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Kansas City Southern has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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