Zacks_Analysts' Blog : Impressive Results at Kansas City - Analyst Blog

Kansas City Southern (KSU) reported fourth quarter 2011 adjusted earnings of $1.01 per share, breezing past the Zacks Consensus Estimate of 79 cents. Reported earnings shot up 63% year over year from 50 cents, driven by higher freight rates. Adjusted earnings for the fourth quarter exclude the impact of 14 cents per share of unfavorable special items related to adjustment for debt retirement costs.

For the full year, earnings per share surged 79.6% year over year to $3.00.

In the fourth quarter, operating income was $150 million, up 11% on the back of 20 basis points (bps) improvement in operating ratio (defined as operating expenses as a percentage of revenue) to 71.6%. Operating income for fiscal 2011 increased 26% year over year to $612 million and operating ratio improved 230 bps to 70.9%.

Quarterly total revenue was $530.3 million in the fourth quarter, up 10.8% year over year but missed the Zacks Consensus Estimate of $547 million. The year-over-year increase was primarily attributable to a record 7% growth in carloadings and pricing gains.

For fiscal 2011, revenue increased 16% year over year to $2.1 billion. Carloadings also grew 8.3% year over year to a record level of 2 million lead by Automotive, Intermodal and coal shipments.

Segment Wise Results

In the fourth-quarter of 2011, the Chemical & Petroleum segment contributed $92.4 million to the total revenue, down 1% year over year due to higher offloading inventory levels owing to maintenance issues with one of the company’s key customers, followed by a reduction in shipments due to contractual bindings of the customer. Volume was 5,940 units, down 4% year over year. Revenue per unit came in at $1,556, up 3% year over year.

Industrial & Consumer Products generated revenue of $123.3 million, up 8% year over year. Business volume was 77,100, down 7% year over year given maintenance production difficulties with large fuel customers, as well as reduced military shipments in the U.S. Revenue per carload was $1,599 units, up 17% year over year.

Agriculture & Minerals segment revenue stood at $112.7 million, up 2% year over year. Business volume was 64,600, down 4% year over year given loss of a major food product shipper, lower soybean shipment to the Gulf of Mexico and continued high corn inventories in Mexico. The RPU increase here is primarily pricing and fuel. Revenue per carload was $1,745 units, up 7% year over year.

Coal segment generated $75 million in revenues, up 20% year over year. Business volume was 76,800 units, up 8% year over year given new contract gains. Revenue per carload was $977, up 11% year over year.

Intermodal segment revenue was $69.9 million, up 29% year over year given increase in international businesses. Business volume was 220,300 units, up 18% year over year. Revenue per carload was $317, up 9% year over year.

The Automotive segment accounted for $37 million, up 30% year over year. Business volume was 23,600 units, up 22% year over year given higher export shipments. Revenue per carload was $1,568, up 7% year over year.

Quarterly Other revenue was $20 million, up 25% year over year.

Liquidity Position

The company exited 2011 with cash and cash equivalents of $72.4 million compared with $85.4 million in 2010. Long-term debt increased to $7.6 billion from $7.1 billion.  Cash from operating activities were $638 million  in fiscal 2011 compared to $496 million in the year ago.  Free cash flow remained at $174.6 million in 2011compared with $173.8 million in year-end 2010.

Guidance

In 2012, management expects to further improve its operating ratio performance and increase its volume and pricing in the mid-single digit range.

Recommendation

In the reported quarter, Kansas CitySouthern improved on a year-over-year basis on the back of several metrics including operating ratio, business growth, pricing gain and cost control. Solid commodities volume, healthy demand for coal, and improved rail efficiency helped Kansas City Southern to deliver stellar performance in the quarter. Railroads are gaining momentum by taking a share out of the trucking industry due to a significant rise in fuel costs of truckers. The railroads are at present carrying more cargo, which is helping them to prosper even amidst a volatile U.S. economy. On the other side, there are several headwinds that are weighing on the carriers’ growth such as stiff competition from other class one freight railroads such as Union Pacific Corp. (UNP) and CSX Corp. (CSX) coupled with the capital intensive nature of business, unionized workforce and stringent railroad regulation.

We maintain our long-term Neutral recommendation on Kansas City Southern. Currently, the company has a short-term Hold rating (Zacks #3 Rank).