Morningstar | Kansas City Southern Is Diving Deep Into Precision Scheduled Railroading
Kansas City Southern improved its normalized first-quarter operating ratio a healthy 1.6 percentage points to 64.2% as it grew revenue 6% despite a 1% carload decline. Our key takeaways concern assertive implementation of precision scheduled railroading and healthy top-line conditions even with the carload decline. We expect no major change to our fair value estimate, and our wide moat rating stands.Clearly the company has embraced precision scheduled railroading. On its earnings call, management gave the floor to its new EVP of PSR (a Canadian National veteran), who provided several early 2019 accomplishments: Velocity and dwell improvements; reduction of locomotives by 100 and cars by 2,000; and 100 fewer weekly crew starts. During 2019 management estimates PSR savings will be about $16 million, with annualized cost reductions of $25 million from headcount reduction, lower depreciation on reduced locomotives and cars, better fluidity, restructured contracts, and lower repair expense. The firm took PSR restructuring charges of $67.5 million, which included impairment of cars and locomotives, severance, and costs related to contract restructuring.
We think revenue conditions are still pretty healthy, though in the quarter some shipments were constrained by teacher protest action in Mexico, and U.S. intermodal appeared to soften due to increased (competing) truck availability. While constrained a bit by loss of some longer-haul intermodal traffic, revenue per carload improved 6.7%, keeping revenue growth at 5.2% even though carloads slid 1%. Management expectations for volume growth in 2019 declined to 2%-3% in 2019 from the 3%-4% quoted in January in part due to the loss of some intermodal volume during the first quarter due to track-obstructing protests in Mexico. Revenue growth expectations of 5%-7% are unchanged, and the adjusted OR projection of 60%-61% by 2021 remains (adjusting fuel tax credit to back above the line).
Kansas City Southern is a transportation holding company with domestic and international rail operations in North America. The company's subsidiary, The Kansas City Southern Railway Company, is a United States Class I railroad that serves a several region in the midwest and southeast regions of United States and has north/south rail route between Kansas City, MO and several main ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas. The company's subsidiary, Kansas City Southern de Mexico, S.A. de C.V. operates a main commercial corridor of the Mexican railroad system and has as its main route a direct rail passageway between Mexico City and Laredo, TX.
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