An amazing thing in the market are stocks such as Kansas City Southern (NYSE:KSU) that are suddenly worth an amazing value such as $10 billion. How many social media stocks or recent IPOs does the market obsess about with market caps hardly above the $1 billion level? Railroads have been hot for years and Warren Buffett has already collected Burlington Northern for his Berkshire portfolio, yet how many people knew that Kansas City Southern was now officially a large cap?
The operator of railroad networks between Kansas City and the Gulf of Mexico ports between Alabama and Texas announced Q4 earnings that provided a strong 15% gain in operating income even with the large decline in coal revenue. The company also provides the unique opportunity to benefit from growth in Mexico with direct rail connections to Mexico City.
Q4 2012 earnings results
The company provided the following highlights for Q4:
The company reported adjusted earnings of $0.92 versus the analyst consensus of $0.82. The number easily surpassed the estimates after several quarters of lackluster earnings including a couple of quarters of missing estimates.
With the stock hitting all-time highs, the news further highlights how the ultimate trend of growing earnings boost stock prices more than whether the company beats analyst estimates.
Coal vs. oil
The stock continues to surge, as the railroad has been able to replace the revenue lost from the decline in utility coal ships. In the sector, Kansas City Southern benefits from a lower coal shipment customer base. Utility coal revenue is now less than 10% of total revenue. Conversely oil revenue was up $6.5 million to $7.3 million in Q4. Combined with increased revenue for frac sand, the company was able to replace most of the decline in coal revenue with oil and sand related to drilling for oil.
Both CSX and Norfolk Southern were more impacted with revenues declining from last year due to lower coal revenues. In Q4 2011, CSX and Norfolk Southern obtained 23% and 24% of revenues from coal, respectively. Both companies averaged around 20% revenue declines in Q4 2012. Consequently, neither stock is surging to all time highs similar to Kansas City Southern.