Will Kansas City Southern (KSU) Beat On Earnings In Q3?

Leading railroad operator, Kansas CitySouthern (NYSE:KSU) is slated to release third-quarter 2016 results on Oct 18, before the market opens.

In the second quarter, the MO-based railroad operator reported better-than-expected earnings. The bottom line also improved significantly on a year-over-year basis, aided by low costs. Operating ratio (operating expenses as a percentage of revenues) improved substantially to 61.3% in the second quarter.

Driven by its efficient cost management, we expect the railroad operator to report impressive earnings in the third quarter as well.

KANSAS CITY SOU Price and EPS Surprise

KANSAS CITY SOU Price and EPS Surprise | KANSAS CITY SOU Quote

Our quantitative model shows that Kansas City Southern is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP:The Earnings ESP for Kansas City Southern is +0.83% with the Most Accurate estimate exceeding the Zacks Consensus Estimate of $1.20 per share by a penny.

Zacks Rank: Kansas City Southern carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Kansas City Southern’s favorable Zacks Rank and positive ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

The company has an impressive track record with respect to earnings per share. It outpaced the Zacks Consensus Estimate in three of the last four quarters with an average earnings beat of 8.63%.

We expect the automotive sector to perform well in the third quarter. At the Morgan Stanley (NYSE:MS) 4th Annual Laguna Conference in Sep 2016, the company revealed that automotive volumes were up 13% as of Sep 13. The company expects mid-single-digit revenue growth on a sequential basis in the to-be-reported quarter. Also, cheap labor and lower transportation costs in the Mexican market compared with the U.S. bode well for the company it as it has service networks across both sides of the U.S.-Mexico border.

We are also impressed by the company's efforts to reward shareholders through dividend payments. However, headwinds related to the energy segment are expected to hurt Kansas City Southern’s third-quarter revenues, as has been the case in the past few quarters. At the abovementioned conference, the company had stated that revenues declined 4% in the third quarter as did carloads (data as of Sep 13). Energy volumes were down 6% as were intermodal volumes on the same date.

Stocks to Consider

Here are a few bank stocks that you may want to consider as our model shows that these have the right combination for an earnings beat this time around:

Genesee & Wyoming Inc. (NYSE:GWR) has an Earnings ESP of +4.26% and a Zacks Rank #2. The company, which will release its third-quarter results on Nov 1, has an impressive history with respect to earnings per share, having outpaced the Zacks Consensus Estimate in each of the last four quarters by an average of 5.71%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Canadian Pacific Railways Limited (NYSE:CP) has an Earnings ESP of +0.47% and a Zacks Rank #3. The company, which will release its third-quarter results on Oct 19, has an impressive history with respect to earnings per share, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 0.96%.

Alaska Air Group (NYSE:ALK) has an Earnings ESP of +0.49% and carries a Zacks Rank #3. The carrier, which has seen the Zacks Consensus Estimate for the third quarter increase 1% to $2.03 per share over the last month, is scheduled to unveil its quarterly results on Oct 20.

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