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Kansas City Southern's (KSU) Q4 Earnings Lag on Volume Woes

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Kansas City Southern’s (KSU - Free Report) fourth-quarter 2020 earnings (excluding 9 cents from non-recurring items) of $1.89 per share missed the Zacks Consensus Estimate of $1.91. However, the bottom line inched up 3.9% year over year, driven by lower costs. Notably, the company is constantly looking to increase efficiencies and reduce costs by virtue of its precision-scheduled railroading (PSR) model.

Meanwhile, quarterly revenues of $693.4 million lagged the Zacks Consensus Estimate of $700.6 million. Moreover, the top line fell 5% year over year due to weak volumes, mainly as a result of service disruptions at the Mexican port of Lazaro Cardenas following teachers' protests.

Notably, Kansas City Southern’s main line to Mexico’s busiest port was blocked due to protests of teacher’s union.  Lower fuel surcharge and fluctuations in foreign currency also hurt the company’s overall carload volumes in the quarter, which declined 3% year over year.

In the reported quarter, operating income (on a reported basis) increased 11.1% to $262.3 million. Moreover, operating income (on an adjusted basis) rose marginally to $275.9 million. Kansas City Southern’s adjusted operating ratio (operating expenses as a percentage of revenues) also improved to 60.2% from 62.4% a year ago. Lower the value of the metric, the better. Operating expenses (adjusted) in the quarter declined 8.3% year over year, thereby leading to an improved adjusted operating ratio despite revenue woes.

Segmental Details

The Chemical & Petroleum segment generated revenues worth $214.8 million, up 15% year over year. While volumes climbed 18% year over year, revenues per carload slid 2% from the prior-year quarter.

The Industrial & Consumer Products segment’s revenues logged $131.7 million, down 15% year over year. Business volumes and revenues per carload decreased 6% and 9%, respectively, on a year-over-year basis.

The Agriculture & Minerals segment’s total revenues inched up 3% to $131.2 million. Business volumes increased 4% while revenues per carload slipped 1% on a year-over-year basis.

The Energy segment’s revenues of $52.6 million were down 16% year over year. While business volumes decreased 12% year over year, revenues per carload dipped 5%.

Intermodal revenues were $77.8 million, down 20% year over year. While business volumes declined 7%, revenues per carload fell 14% year over year.

Revenues in the Automotive segment declined 12% year over year to $54.7 million. While business volumes fell 4%, revenues per carload dropped 8% on a year-over-year basis.

Other revenues totaled $30.6 million, down 23% year over year.

Annual Results

For the full year, the company’s earnings (on an adjusted basis) came in at $6.96 per share. Revenues decreased 8.1% year over year to $2.6 billion due to a 6% decline in volumes. The Zacks Consensus Estimate for earnings was $7 per share while the same for revenues was $2.64 billion. Total capital expenses were $410 million in 2020 compared with $584 million in 2019. The decrease was due to locomotive purchases worth $139 million in 2019.

The company returned $1050 million to its shareholders in 2020 through dividend payments ($154 million) and share repurchases ($896 million). In 2019, the company had rewarded its shareholders with $857 million through dividend payments ($147 million) and share buybacks ($710 million). The company generated free cash flow of $554 million in 2020, up 29% year over year.PSR initiatives contributed directly to 2020 operating expense savings of $96 million.

Outlook

This currently Zacks Rank #3 (Hold) company expects its 2021 revenues to grow in double digits from the 2020 levels. Additionally, its operating ratio is predicted to be 57.5% for the current year. The metric is expected in the 55-56% range for 2022. The company expects current-year earnings per share to be $9 or better. The Zacks Consensus Estimate for 2021 earnings currently stands at $8.44 per share.

Earnings per share for next year are anticipated in the $10.5-$11 band. Capital expenditures for 2021 and 2022 are expected to be roughly 17% of the company’s top line. Free cash flow is estimated to be approximately $700 million for both the current year and the next. PSR initiatives are projected to result in incremental savings of $50 million in 2021.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Upcoming Railroad Releases

Investors interested in the Zacks Transportation – Rail industry will be keenly awaiting the fourth-quarter 2020 earnings reports of key players, namely Canadian National Railway Company (CNI - Free Report) , Norfolk Southern Corporation (NSC - Free Report) and Canadian Pacific Railway Limited (CP - Free Report) .

While Canadian National will announce fourth-quarter 2020 results on Jan 26, Norfolk Southern and Canadian Pacific Railway Limited will release earnings numbers on Jan 27.

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