Does Kansas City Southern's impressive Q1/20 earnings performance really matter? (Tony Hatch)

Tony Hatch (4)

No.

This argument would rely on the not bad argument that everything before the Coronavirus is “old news.” After all, the C19 impact only began to show up mid-March (volumes down 2% that month; then off of a cliff (-21% April-to-date). The company “withdrew previously provided….guidance (revenues, volume, OR & EPS).” And the shutdown of the auto industry has impacts across several commodities (notably auto parts in containers); coming will be the impact of lower oil prices (on CBR, sand, IM, etc) and of the demand destruction in general and specifically of the hottest commodity, refined products heading south into Mexico (units and revenues up 43% in Q1/20). Cross-border business is now 53% of the total (including interlining) so I also worry about the Mexican government’s poor reaction to the C19 pandemic, and the impact on Mexican GDP, even if most of KCS’s related traffic is B2B. The FX situation is also exacerbating the issues at Lazaro Cardenas.

 

Of course it does!

This is a clear demonstration of where KCS is heading absent the pandemic, and the direction they will resume when(ever) it is “over.” Not just on the top line, as impressive as that was, but clearly on the expense side. They are above FY goals on 3/5 KPIs (velocity – up 26% YOY, aided by teachers’ strike comparisons, as well as dwell and fuel efficiency) and close on the other two (train length and car miles/day). There is room for more – they mentioned a focus on fuel efficiency (seemingly the hot topic in the PSR world in 2020), crew movements/planning, reducing leased rolling stock, and “limiting contractor spend”.