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Kansas City Southern: A Preview ahead of Its 3Q17 Earnings

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Part 3
Kansas City Southern: A Preview ahead of Its 3Q17 Earnings PART 3 OF 6

Kansas City Southern: Why Its 3Q17 Operating Margins Could Fall

Analysts’ estimate for 3Q17 operating margins

In the previous part of this series, we looked at analysts’ estimates for Kansas City Southern’s (KSU) 3Q17 revenues. Now let’s look at their projections for KSU’s operating margin in the quarter. According to a survey of analysts by Thomson Reuters, analysts anticipate that KSU will report 35.3% in operating margins. That represents a 2.2% rise year-over-year.

For 2017, analysts expect KSU to post 35.7% in operating margins, indicating an improvement of 60 basis points over the previous year.

Kansas City Southern: Why Its 3Q17 Operating Margins Could Fall

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Will Hurricane Harvey weigh on 3Q17 operating margins?

In 3Q16, KSU’s income statement carried the impact of the Texas flooding. But for 3Q17, the effects of Hurricane Harvey could result in KSU’s detailing the storm’s probable impact on its top line and its operating expenses. That will negatively impact the company’s operating margins in 3Q17.

Kansas City Southern estimates that the incremental operating expense will come from track recovery and inefficiencies in the network. It’s hopeful that there will only be a minimal impact from the storm on its rolling stock and bridge infrastructure. In its 2Q17 earnings call, KSU stated positive train control operating expenses of $9.0 million for 2017. These expenses are slated to rise to $30.0 million next year and $40.0 million in 2019.

Tailwinds for 3Q17 operating margin

Kansas City Southern’s intermodal yields expressed in revenue and profitability per train could contribute to its overall operating margins in 3Q17. Improved density and length of haul on the northbound and southbound intermodal trains could improve its margins. KSU’s operating margins could also benefit from the Mexican fuel excise tax. The company expects this credit to be in the range of $45.0 million to $50.0 million for fiscal 2017.

Kansas City Southern’s US peers Union Pacific (UNP) and BNSF Railway (BRK.B) could also be impacted by Hurricane Harvey. However, its Canadian peers (CNI) could be far less impacted. That could result in better operating margins for Canadian rail carriers (XLI) compared to their US counterparts.

In the next part, we’ll look at analysts’ earnings estimate for KSU in 3Q17.

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