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Why Is Kansas City Southern (KSU) Up 1.8% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Kansas City Southern (KSU). Shares have added about 1.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Kansas City Southern due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Kansas City Southern Beats on Earnings & Revenues in Q2

The company's earnings (excluding 36 cents from non-recurring items) of $1.64 beat the Zacks Consensus Estimate by 4 cents. The bottom line also rose 6.5% on a year-over-year basis. Results were aided by a better operational performance.

The company delivered revenues of $714 million, surpassing the Zacks Consensus Estimate of $703.9 million. Moreover, the top line improved 4.6% on a year-over-year basis mainly owing to strong performance at the Chemicals and Petroleum unit.

Overall, carload volumes were flat year over year as growth in the Chemical and Petroleum unit was mitigated by declines in the Industrial and Consumer products, Agriculture and Minerals, Energy, and Intermodal segments.  

In the reported quarter, operating income (on a reported basis) decreased 15.4% to $208 million. However, operating income (excluding restructuring charges pertaining to Precision Scheduled Railroading initiatives) increased 5.4% to $259 million.

Kansas City Southern’s adjusted operating ratio (operating expenses as a percentage of revenues) improved to 63.7% from 64% a year ago despite higher adjusted operating expenses.  Notably, adjusted operating ratio was negatively impacted to the tune of 130 basis points owing to the loss of the Mexican Fuel Excise Tax credit. Lower the value of operating ratio the better.

Segmental Details

The Chemical & Petroleum segment generated revenues of $188.3 million, up 19% year over year. Volumes expanded 18% year over year. Revenues per carload also inched up 1% from the prior-year quarter.

The Industrial & Consumer Products segment generated revenues of $150.3 million, down 2% year over year. While business volumes contracted 7%, revenues per carload increased 6% year over year.

The Agriculture & Minerals segment’s total revenues were $122.4 million, down 2% year over year. Both business volumes and revenues per carload decreased 1% on a year-over-year basis.

The Energy segment’s revenues logged $53.9 million, down 5% year over year. While business volumes contracted 5% year over year, revenues per carload remained flat.

Intermodal revenues were $92.6 million, down 1% year over year. While business volumes contracted 3%, revenues per carload increased 2% year over year.

Revenues at the Automotive segment increased 5% year over year to $70.9 million. While business volumes were flat, revenues per carload climbed 5%, on a year-over-year basis.

Other revenues totaled $35.6 million, up 22% year over year.

Outlook

For full-year 2019, volume growth is expected to be flat to slightly down. Moreover, the company anticipates current year revenue growth between 5% and 7%. Capital expenditures are anticipated below $600 million in 2019.

Additionally, Kansas City Southern expects operating ratio at the lower end of the 60-61% range by 2021. The compound annual growth rate  (2019-2021 time frame) for adjusted earnings per share is projected  in the low-to-mid-teens band.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, Kansas City Southern has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Kansas City Southern has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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