Looking Past Kansas City Southern’s Weak Results

Kansas City Southern (KSU) recently reported weak results for the third quarter. The company’s revenue of $631.9 million was down 7% from last year, while the net income dropped 4.7%.

Witnessing weakness across segments

The railroad company’s revenue and earnings declined due to a drop in coal, crude, and automotive volumes. In fact, the total carload volumes for Kansas during the quarter were 2% below the volumes reported in the third quarter of 2014. Except for Chemical & Petroleum and Agriculture & Minerals, all other key commodity groups declined during the quarter compared to the third quarter of 2014.

The intermodal trend of Kansas was also negative with its cross-border revenue declining 2 percent in the third quarter of 2015 compared to the same period last year.
This was due to the weakening of fuel prices and the key foreign exchange translations. The cross-border intermodal volumes and revenue for Kansas also declined 10% and 11%, respectively, driven by the weak global commodity demand that negatively impacted its margins.

Trying to improve the operational profile

Moving ahead, Kansas is employing a balanced approach towards investing into the key growth business and returning a majority of the invested capital to its key stakeholders. Kansas is committed towards developing a robust growth profile with 2015 annual capital expenditure targeted to be in the range of $650 million to $670 million. The key railroad company is focused on optimizing its capital structure through ongoing lease conversions, growing its percentage of owned equipments and strategically issuing $500 million of senior notes at nearly 4.95% due 2045.

Kansas is expected to be diversifying its operational risk by exploring new transportation segments including, crude oil, Lázaro Cárdenas Intermodal, automotive, Frac Sand and Cross-Border Intermodal growth segments, some showing expansion while others decline and thus balancing the company’s overall top line growth and encouraging Kansas to deliver sustainable shareholder returns.

As a result of its diversification moves, Standard & Poor's Ratings Services recently upgraded its outlook for Kansas from positive to stable with a long-term and short-term rating of BBB-/A-3, mainly due to the company’s new share repurchase program introduced recently amid weaker global commodity demand and pricing environment.


Keeping the above discussion in mind, investors can consider going long Kansas City Southern as its valuation is attractive with a trailing P/E of 19.86 and a forward P/E of 17.13. These numbers are lower than the industry’s average P/E of 21.54. The company’s profit margin of 19.70% seems impressive. Hence, due to an attractive valuation and optimization efforts, Kansas City Southern looks like a good investment despite weak results.
Published on Oct 29, 2015
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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