Is Kansas City Southern (KSU) Poised to Beat Q3 Earnings?

We expect Kansas City Southern (KSU) to beat expectations when it reports third-quarter 2014 results before the market opens on Oct 17, 2014.

Why a Likely Positive Surprise?

Our proven model shows that Kansas City Southern is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.59%. This is a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Kansas City Southern currently has a Zacks Rank #2 (Buy). Note that the stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

What is Driving the Better-Than-Expected Earnings?

Kansas City Southern, being the only railroad with service networks across both sides of the U.S. and Mexico border, dominates the primary rail networks between these countries. In addition, cheap labor and lower transportation costs in the Mexican market compared with the U.S. also bode well.

Further, the company is demonstrating strong improvement in operating ratio that came in at 68.3% in the second quarter of 2014 and is expected to exceed 70% by the end of 2014. Such operating ratio strength can be mainly attributed to improvement in the grain and automotive commodity segments.

Other Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter.

CSX Corp. (CSX) with an Earnings ESP of +2.13% and a Zacks Rank #2.

Norfolk Southern Inc. (NSC) with an Earnings ESP of +2.25% and a Zacks Rank #2.

Union Pacific Corporation (UNP) with an Earnings ESP of +1.33% and a Zacks Rank #2.