Why Earnings Aren’t the Whole Story for Kansas City Southern (KSU)

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Kansas City Southern (NYSE:KSU) 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 Group Inc (NYSE:JNS) back in 2000. But as much as healthy conditions in the railroad industry have helped Kansas City Southern (NYSE:KSU) earnings, there’s another potential elephant in the room that’s also contributing to investors’ interest in the stock.

Kansas City Southern (NYSE:KSU)Kansas City Southern (NYSE:KSU) 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 (NYSE:KSU) over the past quarter and what we’re likely to see in its quarterly report.

Stats on Kansas City Southern

Analyst EPS Estimate $0.95
Change From Year-Ago EPS 11.8%
Revenue Estimate $576.97 million
Change From Year-Ago Revenue 5.8%
Earnings Beats in Past 4 Quarters 3

Source: Yahoo! Finance.

What in store for Kansas City Southern earnings this quarter?
Analysts have reduced their views on Kansas City Southern (NYSE:KSU) 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 Corporation (NYSE: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 Corporation (NYSE: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 (NYSE:KSU) 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.

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