Kansas City Southern (NYSE:KSU) reported preliminary financial results for the quarter ended December 31, 2014. Declared earnings were $1.28 per share; adjusted for one-time events, earnings came to $1.27 per share – a beat of consensus estimates by $0.04. The company attributed its fourth-quarter earnings growth to rising freight volumes in the automotive and energy sectors. Net income was also boosted by lower fuel costs. At the same time, sinking fuel costs and the depreciation of the Mexican peso slowed revenue growth by about 2% and revenues for the quarter fell short of analyst expectations.
This earnings release follows the earnings announcements from the following peers of Kansas City Southern – Union Pacific Corporation (NYSE:UNP), CSX Corporation (NYSE:CSX), Norfolk Southern Corporation (NYSE:NSC), Canadian National Railway Company (TO:CNR) and Canadian Pacific Railway (NYSE:CP).
See related articles: Union Pacific Corporation (UNP): Strong Earnings but Cautious Outlook , Norfolk Southern Corporation (NSC): Weak Quarter Owing to Revenue Fall, CSX Corporation: Strong Earnings and Strong Outlook, Canadian Pacific Railway (CP-CA): In-line Earnings Performance; No Change in Dividend, Canadian National Railway (CNR): Earnings Beat and a Dividend Positive Surprise.
Highlights
- Summary numbers: Revenues of USD 642.50 million, Net Earnings of USD 141 million, and Earnings per Share (EPS) of USD 1.28.
- Gross margins widened from 41.33% to 43.77% compared to the same quarter last year, operating (EBITDA) margins now 43.77% from 41.33%.
- One-time items weakened operating performance.
- Earnings per Share (EPS) growth exceeded earnings growth
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:
Market Share Versus Profits
Companies sometimes focus on market share at the expense of profits or earnings growth.
KSU's change in revenue compared to the same period last year of 4.37% lagged its change in earnings which was 23.90%. The company's performance this period suggests an effort to boost profitability. While this is good to a point, the fact that the company's revenue performance is lower than the average of the results announced to date by its peers does not bode well from a long-term market share perspective. Also, for comparison purposes, revenues changed by -5.17% and earnings by 2.10% compared to the immediate last quarter.
Earnings Growth Analysis
The company's earnings growth was influenced by year-on-year improvement in gross margins from 41.33% to 43.77% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 41.33% to 43.77% compared to the same period last year. For comparison, gross margins were 43.45% and EBITDA margins were 43.45% in the quarter ending September 30, 2014.
Gross Margin Trend
Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company's performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.
KSU's improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 2.75 days from 27.69 days for the same period last year.
Cash Versus Earnings – Sustainable Performance?
Margins
The expansion in operating (EBIT) margins from 31.86% to 33.29% has also impacted the company's earnings growth. However, one-time items have been a drag on the operating performance. As a result, the company's pretax margins contracted from 29.39% to 26.49%.
EPS Growth Versus Earnings Growth
KSU's change in Earnings per Share (EPS) of 24.27% compared to the same quarter last year is better than its change in earnings of 23.90%. At the same time, this change in earnings is less than the peer average among the results announced by its peer group, suggesting that the company is losing ground in generating profits from its competitors.
Company Profile
Kansas City Southern is a holding company with domestic and international rail operations in North America that are strategically focused on the growing north/south freight corridor connecting key commercial and industrial markets in the central United States with major industrial cities in Mexico. The company is engaged primarily in the freight rail transportation business operating through a single coordinated rail network. Kansas City Southern was founded by Arthur E. Stilwell in 1887 and is headquartered in Kansas City, MO.