Kansas City Southern (KSU) is slated to release its third quarter 2011 results on Friday, October 21, before the opening bell. The current Zacks Consensus Estimate for the third quarter is pegged at 75 cents, representing an annualized growth of 52.65%.
With respect to earnings surprises over the trailing four quarters, Kansas City Southern outperformed the Zacks Consensus Estimate in all the four quarters. The average earnings surprise was a positive 6.36%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude in the last four quarters.
Second-Quarter Performance
On July 21, 2011, the company reported its second quarter 2011 financial results. Quarterly total revenue was $534.9 million, up 15.9% year over year and ahead of the Zacks Consensus Estimate of $522 million. The increase was primarily attributable to higher carloadings and pricing gains.
Quarterly net income was $70.7 million or 64 cents per share compared with $34.6 million or 34 cents per share in the year-ago quarter. Quarterly adjusted EPS of 71 cents surpassed the Zacks Consensus Estimate by a penny.
Quarterly operating ratio was 71.7% compared with 72.4% in the prior-year quarter. This was the best ever second-quarter operating ratio in the company’s history. Total business volume in the reported quarter was 499,800, up 7% year over year. Operating income in the reported quarter was $151.6 million, up 19.2% year over year.
Agreement of Estimate Revisions
In the last 30 days, out of the 15 analysts covering the stock, one analyst increased the EPS estimate for the third quarter of 2011 while three analysts reduced their estimates. Similarly, for the fourth quarter of fiscal 2011, out of the 14 analysts covering the stock, three analysts increased their EPS estimates but one analyst moved in the opposite direction.
For fiscal 2011, in the last 30 days, out of the 17 analysts covering the stock, one analyst increased the EPS estimate while 4 analysts decreased their estimates. Likewise, for fiscal 2012, out of the 16 analysts covering the stock, none increased the EPS estimate while four analysts slashed their EPS estimates.
We believe that the decrease in estimates was mainly due to easing crude oil prices, which will boost the trucking industry growth as they directly compete with the railway industry. Another concerning factor is the volatility in U.S. economy that may hurt the profitability of Kansas City Southern going forward.
Magnitude of Estimate Revisions
During the last 30 days, for the third and fourth quarter of 2011, the Zacks Consensus Estimate was a penny above the current estimates of 75 cents and 78 cents, respectively. Likewise, for fiscal 2011 and 2012, the Zacks Consensus Estimate moved up by two cents from the current estimate of $2.81 and $3.43, respectively.
Earning Surprises
In the previous quarter, Kansas City reported EPS of 71 cents, which was just a penny above the Zacks Consensus Estimate. The current Zacks Consensus Estimates for the ongoing quarter contains 1.33% downside potential but for the fourth quarter 2011, it is reflecting a 2.56% upward potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate upside potentials are 0.36% and 1.17%, respectively.
Our Recommendation
Solid commodities volume, healthy demand for coal, and improved rail efficiency helped Kansas City Southern perform fabulously. Railroads are gaining momentum over the trucking industry due to significant rise in fuel costs.
However, sluggish U.S. economic growth coupled with stiff competition from other freight railroad operators in the U.S. such as Union Pacific Corporation (UNP), CSX Corp. (CSX), and Norfolk Southern Corp. (NSC) may hurt profitability going forward.
We, thus, maintain our long-term Neutral recommendation for Kansas City Southern. Currently, Kansas City Southern has a Zacks#3 Rank, implying a short-term Hold rating on the stock.
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