Revenue up, net lower for Kansas City Southern

Written by Stuart Chirls, Senior Editor
Kansas City Southern locomotive

Photo: YouTube/California Rail Productions

Kansas City Southern reported record first quarter 2018 revenues of $639 million, an increase of 5%, but net income fell slightly from the year-ago period.

Total carload volumes increased 1% compared to the prior year, the Kansas City-, Mo.-based company said.

Revenues increased in four commodity groups, led by a 17% increase in automotive, 10% in chemicals and petroleum, and 9% in intermodal. Industrial and consumer traffic each posted 4% gains.

Commodity increases were partially offset by declines in energy, and agriculture and minerals, of 11% and 2%.

Operating expenses climbed 5% to $420 million, while operating income reached a first-quarter record of $219 million, up 4%.

The first-quarter operating ratio was 65.8%, off 0.4 point on-year.

Net income was $145 million, or $1.40 per diluted share, compared with $147 million, or $1.38 per diluted share, in the first quarter of 2017. KCS, which operates a Mexican subsidiary, said that excluding the impact of foreign exchange, adjusted diluted earnings per share was a first quarter record of $1.30, compared to $1.17 in first quarter 2017.

“Despite congestion across the North American rail network, KCS grew volumes in all commodity groups except energy and agriculture and minerals during the first quarter 2018,” said Kansas City Southern President and Chief Executive Patrick J. Ottensmeyer. “Furthermore, we maintain our outlook for mid-single digit volume growth for full year 2018.”

“Management’s outlook for 80% of its volumes is favorable in 2018, down from 90% three months ago,” observes Cowen and Co. Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “Ten percent (energy) is viewed unfavorably, primarily because of a Texas utility closure and the resulting impact on domestic coal volumes. When that is combined with our expectation for low-to-mid-single digit core pricing this year (with some potential upside from improving freight rates in the U.S. that should help offset negative mix impacts from coal and intermodal traffic), we believe the company is well positioned to continue to achieve solid revenue growth, and we have modeled for 7% in 2018; off the 11% in 2017 but still very solid. Despite the slower than expected start to the year, management left its mid-single digit volume growth guidance unchanged. We continue to expect OR improvement for the year.

“NAFTA remains somewhat of an overhang, although management sounded as optimistic as we’ve heard them on the negotiations. About 30% of the company’s revenue moves across the U.S./Mexico border (a portion of which is on its own assets and a smaller portion of which is interchanged with Union Pacific). Going forward, we see significant growth in the energy and intermodal markets for KCS.”

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