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Kansas City Southern Beats Q2 Earnings, Lowers Volume Guidance

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KSU’s second-quarter earnings

Kansas City Southern (KSU) announced its second-quarter results today before the market opened. Its second-quarter results were a mixed bag for the US’s smallest Class I railroad. KSU has significant exposure to Mexico. The company beat the Thomson Reuters–surveyed analysts’ adjusted EPS estimate of $1.51 by 2.0%. KSU’s adjusted EPS of $1.54 in the quarter rose 16.0% YoY (year-over-year) from $1.33 in the second quarter of 2017.

Today, Kansas City Southern stock opened at $107.25, down 1.1% from yesterday’s close of $108.45. After some initial zigzags, KSU stock rose to $110.88 but fell to $109.70 at 2:00 PM EDT. The markets gave a thumbs up to the stock, as it perceives softening NAFTA worries.

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Second-quarter revenues

Although Kansas City Southern was able to beat its earnings estimates, it didn’t surpass analysts’ revenue estimates of $686.0 million. The company reported revenues of $682.4 million, up 4.0% YoY from $656.4 million in the second quarter of 2017. Its second-quarter revenues rose on a 1.0% volume gain and 3.0% growth in revenue per railcar.

Except for energy, agricultural, and minerals commodities, KSU witnessed a volume rise in all other major commodity groups: automotive, intermodal, industrial and consumer products, and chemicals and petroleum. Notably, Kansas City Southern lowered its fiscal 2018 volume growth guidance to 3.0%–4.0% from the mid-single-digit rise predicted earlier.

KSU’s operating margin contracted 50 basis points to 36.0% in the second quarter from 36.5%. While its revenues grew 4.0% in the quarter, its operating expenses rose 5.0%. This trend explains the reduction in its second-quarter operating margin.

Class I railroads’ Q2 2018 earnings

The second quarter has been good for the US Class I railroads (XTN) in terms of bottom-line growth. Along with Kansas City Southern, major railroads CSX (CSX), Canadian Pacific Railway (CP), and Union Pacific (UNP) have posted growth in their Q2 2018 EPS. Much of this growth was driven by the effect of lower tax rates coupled with stock buybacks.

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