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Will Kansas City Southern's (KSU) Q2 Earnings Disappoint?

Zacks Equity Research

Kansas City Southern KSU is scheduled to report second-quarter 2019 results on Jul 19, before market open.

In the last reported quarter, the company reported better-than-expected earnings and revenues. Both the metrics also improved on a year-over-year basis. Results were aided by higher revenues across most segments and a better operational performance.

However, the company might not be able to replicate the first-quarter outperformance due to multiple headwinds including the soft freight scenario. Furthermore, the fact that the Zacks Consensus Estimate for second-quarter earnings has been revised 5.8% downward over the past 60 days does not bode well for the company.

Let’s delve deeper to unearth the factors likely to influence this railroad operator’s results in the to-be-reported quarter.

We expect high operating expenses (labor as well as fuel) to hurt Kansas City Southern’s bottom line in the second quarter as was the case in the past few quarters. Apart from high costs, sluggish rail traffic numbers are likely to hurt the company’s results in the to-be-reported quarter. In fact, according to the latest Cass Freight Shipments Index report, North American freight shipments declined for six successive months starting from December, 2018.

The company's Intermodal and Automotive segments are expected to perform disappointingly in the second quarter of 2019 as was the case in the first quarter. Weakness pertaining to intermodal volumes on account of a sluggish U.S. market may dent overall rail traffic at Kansas City Southern. Second-quarter results at the Automotive segment are expected to be soft due to the unscheduled shutdown at a customer location.

At the Energy segment, volumes may be hurt in the second quarter due to weakness in the crude oil and frac sand sub-groups. The Zacks Consensus Estimate for second-quarter volumes at this key segment is pegged at 4.9%, below the figure reported in the first quarter of 2019. Similarly, for quarterly revenues, the consensus mark stands at 7.7%, below the figure reported in the first quarter of 2019.

However, the Chemical & Petroleum segment is anticipated to deliver impressive performance in the to-be-reported quarter on the back of expanded volumes. The Zacks Consensus Estimate for second-quarter revenues at this segment is pegged at $177 million, up 4.7% from the figure reported in first-quarter 2019.

Additionally, on the second-quarter conference call, we expect a commentary on Trump's decision to indefinitely suspend plans pertaining to 5% tariff on all goods imported from Mexico. The decision bodes well for Kansas City Southern as it generates a significant amount of revenues from Mexico.  

Kansas City Southern Price and EPS Surprise

Kansas City Southern Price and EPS Surprise

Kansas City Southern price-eps-surprise | Kansas City Southern Quote

Earnings Whispers

Our proven model does not conclusively show that Kansas City Southern is likely to beat estimates in the second quarter. This is because a stock needs to have both — a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Kansas City Southern has an Earnings ESP of 0.00% as the Zacks Consensus Estimate of $1.61 is in line with the Most Accurate Estimate.

Zacks Rank: Kansas City Southern’s Zacks Rank #4 acts as a spoiler and leaves surprise prediction inconclusive.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Alaska Air Group  ALK, Canadian Pacific Railway Ltd. CP and United Airlines Holdings UAL as these stocks too possess the right mix of elements to beat on earnings in the next releases.

Alaska Air Group has an Earnings ESP of +0.68% and a Zacks Rank of 2. The company will report second-quarter 2019 results on Jul 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

Canadian Pacific is a Zacks #2 Ranked company and has an Earnings ESP of +0.44%. The company will release second-quarter 2019 results on Jul 16.

United Airlines has an Earnings ESP of +4.54% and a Zacks Rank #1. This company is scheduled to announce second-quarter 2019 numbers on Jul 16.

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