On Jul 9, 2014, we issued an updated research report on Kansas City Southern (KSU). In the first quarter, the company’s bottom line registered year-over-year growth and also surpassed the Zacks Consensus Estimate. Likewise, the top line also increased year over year although it remained just in line with our expectation.
Currently, the Zacks Consensus Estimate for Kansas City Southern’s second quarter earnings is pegged at $1.17, representing year-over-year growth of 21.8%.
Kansas City Southern is one of the oldest and foremost freight rail transportation companies in the U.S. With price hikes on an average of 4–5% per annum, the company comfortably maintains a double-digit profit margin. As the only railroad with service networks across both the U.S. and Mexican borders, the company dominates the primary rail networks between these countries. Consequently, Kansas City Southern is leveraging the growing opportunities in cross-border intermodal business between the U.S. and Mexico.
In addition, cheap labor costs and lower transportation costs in the Mexican market compared to the U.S., bode well for the company. Moreover, Kansas City Southern is displaying remarkable improvement in its operating ratio that came in at 68.7% in the first quarter of 2014. Going ahead, the company expects earnings improvement in mid teens in 2014 aided by cost control and debt restructuring.
However, Kansas City Southern foresees headwinds in some of its product lines. The company remains wary about crude oil shipment, which is likely to remain subdued during the second quarter. Availability of new pipeline capacity for Bakken crude and delays in crude deliveries from terminals are mainly responsible for this slowdown.
However, the company expects crude oil shipment to accelerate in the second half of the year, resulting in modest growth for full year 2014. Added to that, in terms of grain volumes, the company expects the second half of 2014 to be flat on a year-over-year basis and the full year could to be a little weaker than 2013. Further, the company estimates interest expense at approximately $75 million in 2014, which is likely to be a drag on cash flows.
Kansas City Southern has a Zacks Rank #2 (Buy).
Other Stocks
Other same-sector stocks with a comparable Zacks Rank #2 are Canadian Pacific Railway Ltd. (CP), CSX Corp. (CSX) and Genesee & Wyoming Inc. (GWR).
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