July 17, 2012 / 12:50 PM / in 5 years

UPDATE 2-Coal drop weighs on Kansas City Southern revenue

* Q2 adjusted EPS 85 cents vs Wall Street view 84 cents
    * Revenue up 2 pct but below estimates
    * Utility coal revenue fell 24 pct
    * Company says coal has improved from bottom in spring
    * Company revises down revenue growth view

    By Lynn Adler
    July 17 (Reuters) - Railroad company Kansas City Southern
 reported higher  profit, but warned a big coal shipping
slump weighed on second-quarter revenue and it revised down its
full-year revenue forecast.
    The company said it now expects full-year revenue growth in
the mid single-digits, compared with its earlier outlook for low
double-digit growth, in large part because of the
bigger-than-expected coal business slump.
    Utility coal demand in the quarter was hurt by mild weather
and low natural gas prices, sending revenue for that business
down 24 percent.
    Kansas City Southern executives told analysts on a
conference call that coal volume has climbed since hitting the
bottom in spring but will likely stabilize around current
    "There is certainly a fairly high degree of uncertainty out
there, and  the majority of our customers think they'll
experience some level of growth in the back half, but everyone
is being very cautious," Chief Executive David Starling said on
the call.
    "But there are enough positives in the economy for Kansas
City Southern to maintain strong volume growth in the present
business environment," he said. 
    The company's shares dropped 3.3 percent in mid-morning
trading to $66.57 on the New York Stock Exchange, and are down
2.2 percent for the year. 
    "While the extreme heat we are experiencing across most of
the country and most of our service regions should drive some
increase in demand, the continued low price of natural gas and
relatively high coal stockpiles will likely keep volumes from
growing further" through year-end, Pat Ottensmeyer, executive
vice president of sales and marketing at Kansas City Southern,
said on the call.
    The fourth-largest public U.S. railroad operator posted
second-quarter net income of $120 million, or $1.09 per share,
up from $71 million, or 64 cents a share, a year earlier. 
    Excluding debt retirement costs and other items, the company
earned 85 cents a share. Analysts on average were expecting 84
cents, according to Thomson Reuters I/B/E/S.
    Quarterly operating revenue rose 2 percent to $545 million,
below the analysts' average forecast of $569.9 million. The
company said it had benefited from double-digit revenue
increases in its intermodal and automotive segments.
    "Kansas City Southern's long-term growth outlook remains
positive, underpinned by continued strong growth primarily in
the intermodal and automotive segments," BMO Capital Markets
analyst Fadi Chamoun said in a note. Still, the firm said the
railroad's "valuation is full."
    Intermodal refers to the shipment of goods in containers
that can be shifted from one form of transportation to another,
such as from train to truck.
    While lower-than-anticipated coal traffic clearly had an
impact on second quarter results, Kansas City Southern still
reported a 4 percent increase in carloads, Starling said. 
    The company also had its highest average daily carloads ever
in the month of June, he said.
    The Kansas City, Missouri-based company, which relies
heavily on shipments to and from Mexico, said its cross-border
intermodal volumes jumped 106 percent from a year earlier. The
Kansas City Southern de Mexico unit is a primary Mexican rail
line connecting Mexico and the United States.
    Auto carloads rose 18 percent in the quarter. The company
said it expected growing auto production in Mexico to continue
to boost its shipments of vehicles and related parts.
    Kansas City Southern is the first of the major U.S.
railroads to report second-quarter results.

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