Kansas City Southern (KSU) recently rebounded from a key trend line after pulling back from a fresh multi-year high in early May. With a bullish 28% next-year growth projection and a strong showing in May rail activity, the company looks well positioned for more gains.
Company Description
Kansas City Southern operates as a holding company for rail shippers, operating a network of rails between Kansas City and ports along the Gulf, Texas, Louisiana and Mexico. The company was founded in 1962 and has a market cap of $3.7 billion.
Rail shippers took a big hit in the weak market of 2008 and 2009 as volumes and prices suffered due to declining business activity. But now, with the domestic and global economy on the upswing, the group is once again back in favor, benefiting from surging demand and strict attention to controlling costs. This helped KSU deliver better than expected Q1 results on April 27 that included a 47% earnings surprise.
First-Quarter Results
Revenue for the period was up 26% from last year to $463.3 million. Earnings also came in strong at 44 cents, 47% ahead of the Zacks Consensus Estimate. The company now boasts an average earnings surprise of 26%.
Kansas City Southern’s results were driven by surging demand in Autos, where revenue was up 76% from last year. Multiple other commodity groups saw big gains as well, with agriculture and minerals up 28%, and both chemicals and petroleum and coal up 25%.
Balance Sheet Strengthening
Kansas City Southern remains committed to strengthening its balance sheet, converting $290 million in debt to equity in order to shave off about $34 million in interest payments annually. With a cash position of $160 million against a long-term debt load of $1.91 billion, the company still has some work to do, but is clearly headed in the right direction.
Estimates
With some solid momentum in the corner of this Zacks #1 rank stock, estimates have been on the upswing. The current year is up 39 cents in the last month to $1.86, while the next year has added 46 cents in the same time to $2.39, a bullish 28% growth projection.
With some big gains on the table over the last 6 months, KSU’s forward P/E of 20X trades at a premium to the industry average of 16X. Its P/B multiple of 1.51X is a premium to the industry average of 1.15X but still deep in value territory.
2-Year Chart
KSU hit a new 52-week high in early May on the good quarter before pulling back a bit on general market volatility. More recently, shares rebounded from a key trend line and continue to trend back to the high, take a look below.
Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the new Zacks Momentum Trader Service.
