Morningstar | Kansas City Southern Produced Another Record Revenue Quarter Even Amid System Congestion and Slowing
Kansas City Southern delivered record third-quarter revenue, up 6% from the prior-year period, but what stood out most to us was congestion in the Mexican network as well as expansion in cross-border freight. Results from the two other rails (CP and CSX) that already reported this period have been superb, so KCS’ relatively modest top-line growth and operational struggles pale by comparison.Terminal dwell time deteriorated from 21.6 hours in the prior-year period to 27.8 hours, and velocity declined from 27.5 miles per hour to 25.9--both pretty significant. Still, excluding one-time gains on insurance, the rail leveraged 4% carload growth into 9% EBIT expansion and a 100 basis point year-over-year improvement in adjusted operating ratio (to 63.4%). We maintain our wide moat rating and fair value estimate at this time.
Demand was quite healthy excluding the well-anticipated coal weakness. Greatest revenue gains were in chemicals and petroleum (up 17%) and auto and intermodal (both up 8%). Refined oil product shipments to Mexico drove the former. Average revenue per carload grew only 1.7% from the year-ago period--about half our 3% long run expectation. Cross-border volume and sales grew an impressive 20% and 18%, respectively, and within that, cross-border intermodal units were up 30%.
To recover operating capability, management leased 30 locomotives and shifted crews from southern Mexico to the north. The firm has plans to add a net 17 locomotives in 2019 (buy 50, liquidate 33) and to concentrate this power in Mexico, so we expect the rail to overcome congestion struggles within a few quarters. Management indicates improvement is already visible in recent results. Railroads do well when handling slow predictable volume increases across a system, but struggle with sudden influx of cars in a particular region. We consider the quarter's struggle to be more the pains of a regional sharp demand increase rather than any systemic disruption to our expectations.
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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