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Kirby Spending Money To Make Money

Stephen D. Simpson, CFA

If a company is going to disappoint the Street and lower its guidance for the year, there are worse reasons than those cited by Kirby (KEX) management recently. Part of the shortfall seems to be due to declines in frac activity in the shale gas fields. The other part seems due to accelerated maintenance needs on acquired barges - a circumstance that is disappointing, but doesn't really impact the company's long-term earnings potential all that significantly.

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Recent Results Point to Good and Bad News
Kirby reported a very strong first quarter, but it wasn't all sweetness and light. The company continues to see strong activity in its barge business, as petrochemical companies continue to increase production. Making matters better, barge supply isn't all that high and that allowed the company to realize a 12% increase in revenue per ton.

Now for the bad news. The worst of the bad news is that low natural gas prices are leading gas companies like Chesapeake (CHK) to curtail expensive shale gas development in favor of more oil-heavy production. That means less fracking demand for service providers like Halliburton (HAL), which in turn means less demand for the diesel engines that Kirby produces. Companies like Caterpillar (CAT) and Cummins (CMI) have reported similar conditions, so it's hardly new information.

That said, while lower gas prices are leading to less fracking activity, they are increasing petrochemical production. So, to some extent, Kirby is gaining some of that back in its barge business.


Fixing up What It Paid for
Kirby's acquisition of K-Sea was a significant event for a company with a long history of deals, particularly in how it will expand the company's harbor/coastwise operations. Unfortunately, the deal wasn't quite the deal that the company thought it was getting.

As it turns out, K-Sea skimped on maintenance - at least relative to Kirby's standards. Consequently, the company will be spending more on maintenance this year to bring those vessels up to its standards.

In an odd sense, I can see this as a positive. What it suggests to me is that some other operators have to take shortcuts to stay competitive in a business where pricing is largely out of the companies' control and where infrastructure/capacity matter. So if this is a sign that other companies have to trim corners to compete with Kirby, that argues well for Kirby's competitive position.

A Good Place to Be Long-Term
While there are some risks to Kirby's business from the declining state of the Mississippi River infrastructure (locks and whatnot), the expansion of the coastwise business helps mitigate that a bit. What's more, while the diesel engine business is not having the easiest time of it right now, it's a good long-term diversification strategy for the company.

The Bottom Line
Kirby does not get very cheap very often, and it's not exactly a screaming bargain today. Still, at about seven times 2012 EBITDA, these shares are cheaper than usual and there's an argument to be made that those accelerated maintenance costs have depressed 2012 EBITDA expectations relative to a "normal run-rate." While it would be a little easier to pay up for Kirby if there were a dividend, this is a quality transportation company and one well worth considering on dips like these.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.