Kansas City Southern (KSU) reported first quarter 2012 adjusted earnings per share of 75 cents, surpassing the Zacks Consensus Estimate of 72 cents. The earnings figure jumped 29.3% year over year from 58 cents driven by higher freight rates.
Adjusted earnings for the first quarter exclude the impact of 7 cents per share of unfavorable special items related to adjustment for debt retirement costs.
Quarterly total revenue was $547.5 million, up 12.1% year over year and ahead of the Zacks Consensus Estimate of $543 million. The year-over-year increase was primarily attributable to a record 7% growth in carloading and pricing gains.
In the first quarter, operating income was $157.8 million, up 23% on 260 basis points (bps) improvement in operating ratio (defined as operating expenses as a percentage of revenue) to 71.2%.
Segment Wise Results
In the first-quarter, Chemical & Petroleum accounted for $101.9 million of total revenue, up 6% year over year, attributable in part to offloading inventory levels given maintenance issues with one of the company’s key customers. Volume was 61,500, down 2% year over year. Revenue per unit came in at $1,657, up 8% year over year.
Industrial & Consumer Products accounted for $138.6 million, up 17% year over year. Business volume was 85,100, up 4% year over year. Revenue per carload was $1,629, up 13% year over year.
Agriculture & Minerals accounted for $111.9 million, up 14% year over year. Business volume was 60,700, up 3% year over year. Revenue per carload was $1,843, up 11% year over year.
Energy (previously known as Coal) accounted for $71 million, down 1% year over year. Business volume was 69,700, down 6% year over year. Revenue per carload was $1,019, up 5% year over year.
Intermodal accounted for $68.1 million, up 26% year over year. Business volume was 208,100, up 18% year over year. Revenue per carload was $327, up 6% year over year.
Automotive accounted for $37.5 million, up 21.0% year over year. Business volume was 23,000, up 14% year over year. Revenue per carload was $1,630, up 5% year over year.
Quarterly Other revenue was $18.5 million, up 2% year over year.
Liquidity Position
The company exited the first quarter with cash and cash equivalents of $101.8 million compared with $72.4 million in 2011. Long-term debt was $1.58 billion compared with $1.6 billion in 2011.
Recommendation
We believe Kansas City Southern remains poised to gain from a strong pricing trend in the near term. Volume outlook also remain favorable across major product lines. The company’s productivity initiatives and efficient cost control are expected to drive operating performances over the long term.
Further, strategic investments on infrastructural development will ensure the achievement of long-term growth goals of the company. Management’s efforts to improve its balance sheet strength by reducing debt burden and interest also remain encouraging, making the company attractive for long-term investment.
On the other side, there are several headwinds that challenge the carrier’s growth such as stiff competition from other class one freight railroads such as Union Pacific Corp. (UNP) and CSX Corp. (CSX) followed by capital intensive nature of business, unionized workforce and stringent railroad regulation.
We maintain our long-term Neutral recommendation on Kansas City Southern. Currently, it holds a short-term Zacks #3 Rank (Hold).
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