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Will Kansas City Southern (KSU) Disappoint in Q4 Earnings?

Zacks Equity Research

Kansas City Southern KSU is scheduled to report fourth-quarter 2018 results on Jan 18, before the market opens.

Last reported quarter, the company came up with a negative earnings surprise of 0.6%. Revenues also fell short of the Zacks Consensus Estimate. However, both the top and the bottom line improved on a year-over-year basis owing to 4% expansion in overall carload volumes.

With the Zacks Consensus Estimate for fourth-quarter earnings being lowered 1.9% in the last 60 days, the company might suffer a similar fate this reporting cycle.

Factors at Play

Rising operating expenses might hamper Kansas City Southern’s bottom line in the fourth quarter. In fact, the company’s operating ratio (operating expenses as a percentage of revenues), a key measure of efficiency, could also be pressurized on the same ground. Notably, the Zacks Consensus Estimate for fourth-quarter operating ratio stands at 64% compared with 62% in the third quarter. Essentially, a lower operating ratio is more desirable.

Additionally, going by the last three quarters’ performances, the Energy segment might repeat its dismal performance in the final quarter. This in turn, could affect the company’s top-line growth. The Zacks Consensus Estimate for fourth-quarter Energy segment revenues stands at $63 million, lower than $73 million reported in the third quarter.

Further, congestion in the U.S. rail network, though largely cleared in November, might still an impact on fourth-quarter results.

However, as has been the case in the last three quarters, overall carload volumes are anticipated to aid results in the fourth quarter as well. Additionally, the Chemical & Petroleum, Agriculture & Minerals and Intermodal segments are expected to perform well in the to-be-reported quarter, boosting overall results in turn.

The Zacks Consensus Estimate for Chemical & Petroleum segment revenues stands at $168 million, above $161 million in the third quarter. The consensus mark for Agriculture & Minerals segment revenues is pegged at $127 million compared with $116 million in the last reported quarter. The same for Intermodal segment revenues stands at $102 million, higher than $100 million in the third quarter.

Kansas City Southern Price and EPS Surprise


Kansas City Southern Price and EPS Surprise | Kansas City Southern Quote

Earnings Whispers

Our proven model does not conclusively show that Kansas City Southern is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as elaborated below.

Earnings ESP: Kansas City Southern has an Earnings ESP of -3.16% as the Most Accurate Estimate is pegged at $1.52 per share while the Zacks Consensus Estimate stands higher at $1.56. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Kansas City Southern carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s negative ESP complicates surprise prediction.

We caution against Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Investors interested in the broader Transportation sector may consider ArcBest Corporation ARCB, Expeditors International of Washington, Inc. EXPD and Allegiant Travel Company ALGT as these stocks possess the right combination of elements to beat on earnings in the next releases.

ArcBest has an Earnings ESP of +3.92% and a Zacks Rank of 1. The company will report fourth-quarter financial figures on Jan 30. You can see the complete list of today’s Zacks #1 Rank stocks here.

Expeditors has an Earnings ESP of +0.39% and is a #1 Ranked player. The company will announce fourth-quarter results on Feb 19.

Allegiant has an Earnings ESP of +16.26% and a Zacks Rank #2. The company is scheduled to release fourth-quarter earnings numbers on Jan 30.

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