For KCS, a 2Q record (updated)

Written by William C. Vantuono, Editor-in-Chief
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Kansas City Southern reported record second-quarter 2018 revenues of $682 million, an increase of 4% from 2Q17. Overall, carload volumes increased 1% compared to the prior year.

Revenues for the second quarter of 2018 increased in five commodity groups, led by a 17% increase in Automotive and a 14% increase in Chemicals and Petroleum. Intermodal and Industrial & Consumer both grew by 3%, and Agriculture & Minerals grew by 1%. These increases were partially offset by a 20% decline in Energy, driven primarily by a reduction in utility coal volume due to a Texas utility closure in January 2018.

Operating expenses in 2Q18 were $437 million, 5% higher than 2017. Operating income was a record $246 million, 3% higher than a year ago. The 2Q18 operating ratio of 64.0% was 0.5 points higher than 2Q17.

Reported net income in 2Q18 was $149 million, or $1.45 per diluted share, compared with $135 million, or $1.27 per diluted share in 2Q17. Adjusted diluted earnings per share was a record $1.54, 16% higher than a year ago, excluding the impacts of foreign exchange, debt retirement costs and adjustments to 2017 provisional income tax benefit for the Tax Cuts and Jobs Act.

“Supported by the strength and diversity of our franchise, KCS achieved record quarterly financial results,” stated KCS President and Chief Executive Officer Patrick J. Ottensmeyer. “We persevered through volume headwinds from utility coal and a challenging FX environment impacting Mexico international intermodal business, to deliver topline growth from five of six business units, record franchise cross-border revenue and record adjusted diluted earnings per share. As we move into the second half of 2018 and 2019, we expect volume growth to accelerate, benefiting from a strong economy, network capacity investments and commercial opportunities that are unique to the KCS franchise.”

“KCS reported revenue and operating income results essentially in line with our and consensus estimates, and beat on adjusted EPS,” noted Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Strong core and renewal pricing of 3% and 5%, respectively, were offset by lower volume growth of 1%. While core pricing of 3% was in line with 1Q2018, renewals in the quarter registered a very strong 5%. This strong environment for pricing is in part a result of the tight trucking market and a solid economic backdrop. The pricing commentary from KCS was in line with the results from our quarterly rail shipper survey, which showed pricing expectations up 90 bps on a sequential basis, the second-largest gain in a 10-year period.

“Volume growth totaled only 1% this quarter, which caused management to lower full-year volume growth to 3%-4% from mid-single digits. Given its performance this year thus far, KCS needs much stronger second-half volume growth to hit its new guide. Management gave a breakdown for how they expect to achieve this; a couple of percentage points increase with easier 2H comps, 1% each for improvements in refined product and crude, and potential improvements in intermodal at the Port of Lazaro Cardenas. Part of the railroad’s issues were dealing with a decline in the Mexican peso. KCS bills in U.S. dollars, while the truckers are billing in Pesos leaving, KCS looking far more expensive. Management has discussed using rebates to help attract business on trains that have 25%-35% available capacity.We are maintaining our 2018 and 2019 EPS estimates of $6.10 and $6.90, respectively. We are lowering our multiple half a turn to 18x to reflect overall trade concerns. Using our new multiple, our new price target falls slightly to $124, and we continue to remain on the sidelines but may revisit in the future. We are maintaining our Market Perform rating on the stock.”

 

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