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Will Kansas City Southern Beat 1Q16 Earnings Estimates?

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Analyst estimates

Analysts are expecting Kansas City Southern’s (KSU) GAAP EPS (earnings per share) to be $0.98 per share for 1Q16. In the first quarter of 2015, KSU’s reported EPS was $0.91, which translates into a projected rise of 7.7% compared with the same period last year. For fiscal 2016 and 2017, analysts are projecting an EPS of $4.54 and $5.16, respectively, against the $4.4 reported in 2015.

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Cost considerations

As the above graph shows, KSU’s management issued earnings guidance only for 1Q15. The company was able to beat Wall Street analysts’ estimates in three out of five of the last reported quarters. KSU’s management recently reiterated its long-term goal to fix the operating ratio in 2017, which could be challenging given the smaller scope for cost reductions in 2016.

On the costs front, the company is expecting benefits from fuel costs for on-highway diesel. According to the US Energy Information Administration, the estimated average cost for on-highway diesel in 2016 will be lower that it was in 2015. This will help KSU in minimizing costs, which will be accretive to the EPS in the coming quarters.

In 2015, the company simplified its capital structure through the exchange of $2.0 billion in senior notes, which should reduce the interest expenses ahead and push the EPS forward. However, KSU began converting its leased equipment into owned equipment in 2014. This move has resulted in certain lease termination costs. These are mostly one-time charges. The company expects lease conversions in 2016, which may result in lease termination costs and put pressure on EPS.

Peer group EPS

Investors should note that analysts are estimating a growth of 3.2% in KSU’s GAAP EPS in 2016 compared with last year. Analysts have the following growth projections for KSU’s peers for the same period:

  • Canadian National Railway (CNI): 6%
  • Canadian Pacific Railway (CP): 10%
  • Norfolk Southern (NSC): 5.6%
  • CSX (CSX): -8.7%
  • Union Pacific (UNP): -3.1%
  • Genesee & Wyoming (GWR): -3.4%

Investors interested in the transportation space can consider the iShares US Industrials ETF (IYJ). This ETF holds 4.9% of its holdings in US railroads.

In the next part, we’ll go through what analysts are recommending for Kansas City Southern and its peers.

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