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Category: Kansas City Southern (KSU)
Date: 18 October 2020 Stock price of Kansas City Southern: $179.01 We take a look at the 3rd quarter 2020 earnings report of freight rail operator Kansas City Southern (KSU) and compare their stock price performance to rivals such as Union Pacific (UNP) and Norfolk Southern (NSC).
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Our performance this year has been remarkable given the challenges we have faced. This strong and sustainable operational performance has given us confidence to reintroduce elements of our guidance. Our outlook has improved for adjusted operating ratio, free cash flow and adjusted diluted earnings per share, and the Company is positioned to deliver superior growth and customer service "
More About Kansas City Southern (KSU)
Headquartered in Kansas City, Mo., Kansas City Southern (KCS) (NYSE: KSU) is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holding is The Kansas City Southern Railway Company, serving the central and south central U.S. Its international holdings include Kansas City Southern de Mexico, S.A. de C.V., serving northeastern and central Mexico and the port cities of Lázaro Cárdenas, Tampico and Veracruz, and a 50 percent interest in Panama Canal Railway Company, providing ocean-to-ocean freight and passenger service along the Panama Canal. KCS' North American rail holdings and strategic alliances with other North American rail partners are primary components of a unique railway system, linking the commercial and industrial centers of the U.S., Mexico and Canada.
Overview of Kansas City Southern 3rd quarter 2020 earnings report
The data below refers to the most recent quarter unless specified otherwise:
- Revenues: $659.6 million (down from $747.7 million for the same quarter of the previous year)
- Revenue decreased by -11.7% over the last 12 months
- Operating expenses: $388.1 million (down from $465.7 million for the same quarter of the previous year)
- Operating expenses decreased by -166% over the last 12 months
- Net income: $189.7 million (up from a $180.7 million for the same quarter of the previous year)
- Diluted earnings per share: $2.01 (up from $1.81 for the same quarter of the previous year)
- PE ratio of Norfolk Southern : 28.3
- Diluted weighted-average shares outstanding: 94.380 million (down from 99.699 million for the same quarter of the previous year)
Management commentary on their 3rd quarter 2020 earnings
KANSAS CITY, Mo.--(BUSINESS WIRE)--Kansas City Southern (KCS) (NYSE:KSU) reported revenues of $659.6 million, a decrease of 12% from third quarter 2019. Overall, carload volumes were down 4% compared to prior year
As KCS' outlook improves, the Company has updated and improved elements of its 2020 guidance. The Company now expects adjusted diluted earnings per share to be slightly higher on a year over year basis, and full-year 2020 adjusted operating ratio to be on the low end of the 60% to 61% range. Additionally, previously provided 2020 capital expenditure guidance remains $425.0 million or below. Guidance for 2021 and 2022 capital expenditures remains at ~17% of revenue. Finally, the Company expects free cash flow to be approximately $550 million in 2020. See the following pages for a reconciliation of historical free cash flow.
The Company intends to enter into accelerated share repurchase agreements on or around October 16, 2020 for the repurchase of approximately $500 million of its outstanding shares of common stock. This will be executed under the Company’s $2 billion share repurchase program announced on November 12, 2019.
As KCS' outlook improves, the Company has updated and improved elements of its 2020 guidance. The Company now expects adjusted diluted earnings per share to be slightly higher on a year over year basis, and full-year 2020 adjusted operating ratio to be on the low end of the 60% to 61% range. Additionally, previously provided 2020 capital expenditure guidance remains $425.0 million or below. Guidance for 2021 and 2022 capital expenditures remains at ~17% of revenue. Finally, the Company expects free cash flow to be approximately $550 million in 2020. See the following pages for a reconciliation of historical free cash flow.
The Company intends to enter into accelerated share repurchase agreements on or around October 16, 2020 for the repurchase of approximately $500 million of its outstanding shares of common stock. This will be executed under the Company’s $2 billion share repurchase program announced on November 12, 2019.
“Kansas City Southern’s strong third quarter results demonstrate the Company’s resiliency and the tremendous discipline and focus of our workforce,” stated President and Chief Executive Officer, Patrick J. Ottensmeyer. “Our service was tested this quarter with an unprecedented volume recovery and two hurricanes that struck the heart of our network. KCS responded by steadfastly executing the lessons learned in its Precision Scheduled Railroading (PSR) implementation, which included aligning resources with rapidly increasing demand while maintaining a keen focus on preserving efficiencies created from PSR principles.
"Our performance this year has been remarkable given the challenges we have faced. This strong and sustainable operational performance has given us confidence to reintroduce elements of our guidance. Our outlook has improved for adjusted operating ratio, free cash flow and adjusted diluted earnings per share, and the Company is positioned to deliver superior growth and customer service.
“It is from this position of solid financial performance, confidence in the sustainability of our operations, outlook for our business and our outstanding liquidity and financial position that we announce our intent to enter into a new $500 million accelerated share repurchase."
"Our performance this year has been remarkable given the challenges we have faced. This strong and sustainable operational performance has given us confidence to reintroduce elements of our guidance. Our outlook has improved for adjusted operating ratio, free cash flow and adjusted diluted earnings per share, and the Company is positioned to deliver superior growth and customer service.
“It is from this position of solid financial performance, confidence in the sustainability of our operations, outlook for our business and our outstanding liquidity and financial position that we announce our intent to enter into a new $500 million accelerated share repurchase."
Stock price history of Kansas City Southern (KSU) over the last 5 years
The image below shows the stock price performance of Kansas City Southern (KSU) over the last 5 years. And its been a pretty good time for KSU stockholders with the stock of Kansas City Southern providing a return of 105% to its stockholders over the last 5 years.
The stock of Kansas City Southern is trading at a lot closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of Kansas City Southern stock is positive at this point in time.
The stock of Kansas City Southern is trading at a lot closer to its 52 week high than it is to its 52 week low which is a clear indication that the short term sentiment and momentum of Kansas City Southern stock is positive at this point in time.
Kansas City Southern (KSU) vs Union Pacific (UP) vs Norfolk Southern (NSC) over last 5 years
The image below shows the stock price performance of Kansas City Southern (KSU) vs Union Pacific (UP) vs Norfolk Southern (NSC) over last 5 years. All three firms are active in the freight rail space. Their stock price trends are fairly similar but the returns provided by the three firm's stock is very different over the last 5 years. The summary below shows the stock price return of the various rail operators, sorted from best to worst performer.
- Union Pacific (UNP): 150.5%
- Norfolk Southern (NSC): 145.9%
- Kansas City Southern (KSU): 104.7%
Our latest stock valuation of Kansas City Southern
So what do we value Kansas City Southern (KSU) stock at based on their latest earnings report? Based on their 3rd quarter 2020 earnings report our valuation model provides a target price (full value price) for Kansas City Southern at $156.40 a stock. We therefore believe the stock of Kansas City Southern (KSU) is overvalued at its current price.
We usually recommend that long term and fundamental investors look to enter a stock at least 10% below our target price, which in this case is $156.40. A good entry point would therefore be at $140.80. Since the stock of Kansas City Southern (KSU) is trading at well above our suggested entry price we rate the stock of Kansas City Southern as a sell.
We usually recommend that long term and fundamental investors look to enter a stock at least 10% below our target price, which in this case is $156.40. A good entry point would therefore be at $140.80. Since the stock of Kansas City Southern (KSU) is trading at well above our suggested entry price we rate the stock of Kansas City Southern as a sell.
Next earnings release of Kansas City Southern
It is expected that Kansas City Southern (KSU) will release their 4th quarter 2020 earnings report in middle Janaury 2021