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Will Kansas City Southern's (KSU) Q1 Earnings be a Let Down?

Zacks Equity Research
Updated

Kansas City Southern KSU is scheduled to report first-quarter 2018 results on Apr 20, before the market opens.

Last quarter, the company delivered a positive earnings surprise of 1.5%. Moreover, the company has an impressive earnings history, having outperformed the Zacks Consensus Estimate in three of the preceding four quarters with an average beat of 2.3%.

However, things do not look up for the company this quarter. As a result, the stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised 3.5% downward in the last 60 days.

Factors at Play

High operating expenses are expected to hurt the company's bottom line in the first quarter as was the case previously.

The uncertainty over the North American Free Trade Agreement (NAFTA) might also hamper results in the to-be-reported quarter. This is because the railroad operator draws a significant portion of its revenues from U.S.-Mexico shipments.

Kansas City Southern's trailing 12-month return on equity (ROE) undercuts its growth potential. The company’s ROE of 12.1% compares unfavorably with its industry’s 20.4% ROE and the S&P 500 index’s 16% tally.

However, overall volume growth is anticipated to aid results in the first quarter. Additionally, the growth of intermodal volume augurs well for the company and is anticipated to drive intermodal revenues.

The new tax law should also boost profits for the company, leading to bottom-line growth in the first quarter. Its efforts to reward shareholders through dividend payments and buybacks are a further positive.

Earnings Whispers

Our proven model does not conclusively show that Kansas City Southern is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as elaborated below.

Zacks ESP: Kansas City Southern has an Earnings ESP of -3.02% as the Most Accurate estimate stands at $1.33 per share, lower than the Zacks Consensus Estimate of $1.37. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Kansas City Southern carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s negative ESP leaves surprise prediction inconclusive.

We caution against Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Kansas City Southern Price and EPS Surprise

 

Kansas City Southern Price and EPS Surprise | Kansas City Southern Quote

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Stocks to Consider

Investors interested in the broader Transportation sector may consider stocks like American Airlines Group Inc. AAL, JetBlue Airways Corporation JBLU and Expeditors International of Washington, Inc. EXPD as these possess the right combination of elements to deliver an earnings beat this time around.

American Airlines has an Earnings ESP of +3.35% and a Zacks Rank of 3. The company is scheduled to announce first-quarter results on Apr 26.

JetBlue Airways is a #3 Ranked player and has an Earnings ESP of +4.28%. The company is slated to release first-quarter numbers on Apr 24. You can see the complete list of today’s Zacks #1 Rank stocks here.

Expeditors is a #3 Ranked player and has an Earnings ESP of +2.09%. The company will report first-quarter earnings figures on May 8.

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JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
Kansas City Southern (KSU) : Free Stock Analysis Report
 
Expeditors International of Washington, Inc. (EXPD) : Free Stock Analysis Report
 
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