Kansas City Misses 3Q Sales Est.; Shares Drop

Shares of Kansas City Southern closed 2.7% lower on Friday after the transportation company reported lower-than-expected 3Q revenues. Its revenues dropped 12% to $659.6 million lagging the Street consensus of $662.7 million. The sales decline was due to lower carload volumes, lower commodity prices, lower fuel surcharge, and unfavourable currency, the company said.

Meanwhile, Kansas City’s (KSU) 3Q EPS of $1.96 increased from $1.94 a year ago and exceeded analysts’ expectations of $1.90.

The company anticipates 2020 EPS to be slightly higher on a year-over-year basis and expects adjusted operating ratio to be at the low end of the 60% to 61% range. It reiterated its 2020 capital expenditure guidance of a maximum of $425 million and expects its 2020 free cash flow to be approximately $550 million.

Kansas City’s CEO Patrick J. Ottensmeyer said “Our service was tested this quarter with an unprecedented volume recovery and two hurricanes that struck the heart of our network.” Ottensmeyer added that “KCS responded by steadfastly executing the lessons learned in its Precision Scheduled Railroading (PSR) implementation, which included aligning resources with rapidly increasing demand while maintaining a keen focus on preserving efficiencies created from PSR principles.” (See KSU stock analysis on TipRanks).

On Oct. 18, BMO Capital analyst Fadi Chamoun upgraded KSU to Buy from Hold and lifted the price target to $205 (14.5% upside potential) from $200. The analyst said that the company’s network offers “significant” volume growth opportunities and has lesser growth hurdles than other U.S. rail networks.” The 5-star analyst also added that the implementation of PSR enables growth at a very low incremental cost, which will support margins and earnings growth in the coming years. He expects productivity gains and the improving demand scenario to drive the stock’s multiple higher.

Currently, the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus is based on 7 Buys and 8 Holds. The average price target of $188.33 implies upside potential of about 5.2% to current levels. Shares have increased by 16.9% year-to-date.