Why Earnings Aren't the Whole Story for Kansas City Southern

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Kansas City Southern will release its quarterly report on Friday, with the stock having risen to levels it hasn't seen since it spun off its interest in Janus Capital back in 2000. But as much as healthy conditions in the railroad industry have helped Kansas City Southern earnings, there's another potential elephant in the room that's also contributing to investors' interest in the stock.

Kansas City Southern is a relative baby in the railroad industry, with several of its larger peers having five to 10 times as much revenue as the regional carrier. But the railroad's size gives it some important strategic advantages over its peers as well, including the prospects for larger competitors to use a takeover bid to expand their own rail networks. Let's take an early look at what's been happening with Kansas City Southern over the past quarter and what we're likely to see in its quarterly report.

Stats on Kansas City Southern

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$576.97 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

What in store for Kansas City Southern earnings this quarter?
Analysts have reduced their views on Kansas City Southern earnings in recent months, reducing estimates for the June quarter by $0.03 per share and full-year 2013 calls by $0.04 per share. That hasn't stopped the stock, though, as it's added 6% gains since mid-April.

Recently, we've seen the railroad industry adapt to changing conditions, as old mainstays like coal shipments have given way to poor pricing environments and demanded reactions from railroads to keep volumes up. Earlier today, CSX said that it believes that the trend toward increased rail transport of crude oil from hard to reach areas like the Bakken is likely to continue, even with domestic crude prices getting more expensive compared to world oil prices and even in light of a recent train derailment in Quebec, which involved a crude-oil explosion. In its quarterly report Tuesday night, CSX posted reasonable gains of about 4.5% in net income on a 2% revenue jump, beating expectations but reining in any exuberance about its potential for accelerating earnings growth.

For its part, Kansas City Southern has also taken steps to take advantage of the trend toward moving oil and food toward the eastern part of the country, with plans to invest more than half a billion dollars in capital expenditures in order to make necessary improvements. Even with crude-oil growth of 350% last year, the railroad still has plenty of potential to ramp up shipments much further this year and beyond.

Another benefit for Kansas City Southern has come from strength in the auto sector, which has helped both it and larger rival Union Pacific produce growth in past quarters. Auto sales have surged lately, and so increasing volumes of vehicles could help offset weakness in coal and other struggling commodities.

Yet arguably the biggest upside potential Kansas City Southern has is as a potential takeover target. Ever since the Berkshire Hathaway purchase of Burlington Northern, railroads have been on the radar screen as buyout candidates. The challenge, though, is that a Union Pacific bid would probably raise antitrust concerns, while for smaller companies like CSX, Kansas City Southern would be a pretty big bite to swallow. Nevertheless, as long as industry conditions remain good, expect takeover speculation to continue.

In Kansas City Southern's earnings report, watch for the current status of the company's continuing moves toward greater diversity of transported goods. If it can keep on top of trends, Kansas City Southern has plenty of room to grow.

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The article Why Earnings Aren't the Whole Story for Kansas City Southern originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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