Kansas City Southern (NYSE: KSU) delivered a first-quarter beat Wednesday that reflected, among other things, early progress in the company’s enaction of Precision Scheduled Railroading, or PSR, techniques, according to Raymond James.
The transportation holding company reported first-quarter adjusted EPS of $1.54, significantly ahead of the consensus estimate of $1.44. Adjusted EBIT of $242 million topped the Street’s $232-million forecast.
Despite a 1-percent decline in volumes, Kansas City Southern reported 6-percent revenue growth, fueled by a favorable commodity mix and core pricing growth, Brown said in a Thursday note. (See his track record here.)
The company provided an extensive overview of its PSR initiatives. Although it’s still early, Kansas City Southern witnessed an 11-percent improvement in train velocity and 5-percent improvement in dwell time, the analyst said.
A reduction of around 100 locomotives and 2,000 freight cars seem to have improved cycle times, Brown said.
PSR also allowed the company to eliminate the “least reliable assets” from its fleet, lowering mechanical failures by almost 40 percent in the first quarter, the analyst said. The railroad expects $16 million in opex savings in 2019 from its initial PSR actions, he said.
While reiterating its revenue growth guidance of 5-7-percent for 2019, Kansas City Southern reduced its volume growth outlook from 3-4 percent to 2-3 percent.
The lowered volume growth guidance “could be a good thing,” as it would allow the company to shift its focus from growth to PSR enaction, Brown wrote. As the company becomes more efficient, its operating ratio will improve, which will support stronger FCF generation, he said.
The railroad also expects to generate a low-to-mid teens EPS CAGR through 2021.
Kansas City Southern shares were trading up 1.57 percent at $124.80 at the time of publication Thursday.
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