Kansas City Southern’s Q3 Earnings Beat on Higher Volume

Kansas City Southern (KSU) reported third-quarter 2014 adjusted earnings of $1.29 per share, beating the Zacks Consensus Estimate of $1.26. Moreover, adjusted earnings increased 17% from $1.07 earned in the year-ago quarter buoyed by higher freight volumes and operational efficiency.

Total revenue stood at $677.5 million in the third quarter, up 9% year over year and also ahead of the Zacks Consensus Estimate of $668 million. The year-over-year increase can primarily be attributed to 28% growth in automotives and 13% improvement in the Industrial & Consumer Products segment.

In the reported quarter, operating income came in at $229.4 million, up 14.5% year over year. Meanwhile, operating ratio was 33.9% as against 32.2% in the year-earlier quarter.

Segment-wise Quarterly Results

Chemical & Petroleum segment contributed $117.4 million in revenues, up 7% year over year. On a year-over-year basis, volume was up 2% while revenue per unit grew 5%.

Industrial & Consumer Products generated revenues of $166.9 million, up 13% year over year. Business volume was up 6% year over year and revenue per carload improved 7% year over year.

Agriculture & Minerals segment revenues totaled $104.6 million, up 8% year over year. Business volume grew 5% year over year. Also, revenue per carload inched up 3% year over year.

Energy segment generated $90.7 million in revenues, down 4% year over year. Business volume dropped 3% year over year. Likewise, revenue per carload fell 2% year over year.

Intermodal segment revenues were $106.7 million, up 11% year over year. Business volume rose 5% year over year while revenue per carload also spiked 6% year over year.

Automotive segment accounted for $65.8 million of the total revenue, up 28% year over year. Business volume rose 22% year over year. Revenue per carload hiked 5% year over year.

Quarterly Other revenues were $25.4 million, up 1% year over year.

Liquidity Position

The company exited the third quarter with cash and cash equivalents of $285.8 million compared with $429.5 million in 2013. Long-term debt in the reported quarter was $1,846.1 million against $1,856.9 million at the end of 2013. The company had free cash flow of $278.3 million at the end of first nine months of 2014 compared with $190.7 million in the corresponding year-ago period. Likewise, capital expenditures for the nine months ended Sep 30, 2013 amounted to $403.5 million compared with $381.8 million for the same period a year ago.

Recommendation

We believe Kansas City Southern is well-positioned to benefit from the strong pricing trend. The company’s productivity initiatives and efficient cost-control measures are expected to drive operating performance over the long term. Further, strategic investments in infrastructural development will ensure the achievement of growth goals.

However, we remain cautious on the stock due to competitive pressure, a unionized workforce, heavy investments and increased railroad regulation. Additionally, the ongoing uncertainties in coal and a competitive market may also pose significant headwinds to the company.

Kansas City Southern, which operates with other railway companies like Canadian National Railway Company (CNI), Norfolk Southern Corp. (NSC) and Canadian Pacific Railway Limited (CP), retains a Zacks Rank #2 (Buy).