Morningstar | Kansas City Southern Reached Record 4Q and Full-Year Revenue but Margin Stagnates due to Congestion
Kansas City Southern grew fourth-quarter sales 5% on flat volume and generated an operating ratio of 63.1%, or 64.3% after eliminating nonrecurring insurance recoveries. This pales a bit versus the prior-year’s 64.0% and management attributes the lack of progress to network congestion, particularly around the Mexico-U.S. border. The rail increased quarterly normalized EPS by 13%. On an annual basis, the firm grew revenue 5% on 2% carload improvement and maintained a 64.3% adjusted OR to increase full-year normalized EPS by 14%. We maintain our wide moat rating and anticipate any change to our fair value estimate will be minor.While flat overall, volume grew strongest in refined products moving south into Mexico and cross-border intermodal, as well as in plastics. Frac sand declined, but petroleum improved due to shipments of Canadian crude. Coal declined due to the long-telegraphed shutdown of a Texas coal burning power producer.
Management gave a bit more guidance than on recent calls. Looking forward, the firm expects 2019 growth of 3%-4% in volume and 5%-7% in sales, and targets a 60%-61% OR by 2021. The company project this will grow EPS at a low- to mid-teens EPS CAGR for the next three years. We maintain our existing projection of a 60% OR in 2022.
As we’ve seen at all other Class 1 railroads, Kansas City Southern is implementing precision scheduled railroading, or PSR, principles pioneered by the late railroad turnaround expert, Hunter Harrison. The firm hired Canadian National veteran Sameh Fahmy (who worked with Harrison for years) as a part-time consultant to help instill this car-velocity focused operating methodology to Kansas City Southern. Typically, PSR includes reduction in personnel and assets, including locomotives, rolling stock, yards, and real estate. We expect the same will play out here, and adapting PSR supports our projection of continued margin improvement.
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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