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.
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.
Another benefit for Kansas City Southern has come from strength in the auto sector, which has helped both it and larger rival Union Pacific Corporation (NYSE:UNP) produce growth in past quarters. Auto sales have surged lately, and so increasing volumes of vehicles could help offset weakness in coal and other struggling commodities.
Yet arguably the biggest upside potential Kansas City Southern has is as a potential takeover target. Ever since the Berkshire Hathaway Inc. (NYSE:BRK.A) purchase of Burlington Northern, railroads have been on the radar screen as buyout candidates. The challenge, though, is that a Union Pacific Corporation (NYSE:UNP) bid would probably raise antitrust concerns, while for smaller companies like CSX, Kansas City Southern would be a pretty big bite to swallow. Nevertheless, as long as industry conditions remain good, expect takeover speculation to continue.
In Kansas City Southern’s earnings report, watch for the current status of the company’s continuing moves toward greater diversity of transported goods. If it can keep on top of trends, Kansas City Southern has plenty of room to grow.
No matter what industry you’re looking at, the best investing approach is to choose great companies and stick with them for the long term.
The article Why Earnings Aren’t the Whole Story for Kansas City Southern originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.
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