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Kirby Gains From Marine Transportation Unit Amid Cost Woes

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We recently initiated coverage on Kirby Corporation (KEX - Free Report) — the largest domestic tank barge operator in the United States. The company is benefiting from the impressive performance of its marine transportation division. However, distribution and services revenues have suffered lately due to disappointing performance of the oil and gas market.  

The Bullish Case

Significant growth at the company’s marine transportation division is commendable. Segmental revenues increased 12% in 2018 to $1.48 billion. Improved barge utilization and spot contract pricing in the inland market contributed to the uptick. The additions of Higman inland tank barges (acquired on Feb 14, 2018,) and Targa pressure barges (acquired on May 10, 2018,) also provided a boost to the segmental performance. The 2019 outlook for the inland marine transportation market is favorably driven by expectations of higher customer demand. For 2019, segmental revenues are expected to increase between high-single digits and low teens.

Kirby’s growth-by-acquisition strategy is also encouraging. Notably, this Houston, TX-based company's recent acquisition (marine transportation fleet of Cenac Marine Services) was completed in March 2019. The buyout has bolstered Kirby’s fleet. Prior to being acquired, Cenac’s fleet comprised 63 30,000-barrel inland tank barges with approximately 1.9 million barrels of capacity, 34 inland towboats apart from two offshore tugboats.

For the tank barges, the average age of the Cenac fleet is approximately four years, and six years for the towboats. In a bid to expand its fleet, Kirby has made other purchases like three inland tank barges from a leasing company and 27 inland tank barges (barrel capacity of 306,000 barrels) from CGBM in December 2018.

The Bearish Case

Due to the disappointing performance of the oil and gas market, distribution and services revenues decreased 10.2% year over year in the fourth quarter of 2018. Sluggish oilfield activities and volatility in the commodity’s price in the final quarter of 2018 are anticipated to hamper distribution sales and service of engines, new and overhauled transmissions and associated parts in 2019.

Moreover, high operating expenses at both segments of the company are limiting bottom-line growth. At the marine transportation division, costs increased 12% year over year in 2018.  Meanwhile, expenses increased 69% at the distribution and services mainly on costs pertaining to the acquisition of S&S. High costs are likely to limit bottom-line growth in 2019 as well.

High debt levels also worry us. Debt to capitalization ratio, a measure of Kirby’s financial leverage, at the end of 2018 was 30.5% compared with 24.2% a year ago. The increase in the ratio does not bode well and implies a greater amount of risk.

Due to the above-mentioned headwinds, shares of this Zacks Rank #3 (Hold) shipping company have lost 8.3% of in the past six months.

Six-Month Price Performance

Key Picks

A few better-ranked stocks worth considering in the Zacks Transportation sector are Azul (AZUL - Free Report) , Atlas Air Worldwide Holdings (AAWW - Free Report) and Radiant Logistics (RLGT - Free Report) . While Azul sports a Zacks Rank #1 (Strong Buy), Atlas Air Worldwide and Radiant Logistics carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Azul and Atlas Air Worldwide have rallied more than 10% each on a year-to-date basis. Meanwhile, Radiant Logistics has surged more than 31% in the same time frame.

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