KCS stock fell $8.94, or 7.7%, to its lowest level since July 1, 2014. Volume of 2.2 million shares at 12 p.m. EDT was more than triple the full-day trading average. The stock was the biggest loser among the 20 components of the Dow Jones Transportation Average, lopping off about 54 points from the Average, which was down 132 points, or 1.4%. Union Pacific stock dropped 3.4%; CSX, 3%; and Norfolk Southern, 3.5%.
KCS said it “now expects low single-digit revenue growth, reduced from the mid single-digit revenue growth provided in the previous full-year 2015 guidance issued in January 2015. The reduced revenue guidance reflects slower year-to-date carload growth primarily from the energy sector, along with a continued deterioration in the value of the Mexican peso against the U.S. dollar and lower fuel surcharge revenues driven by lower WTI prices. (WTI is West Texas Intermediate, also known as Texas light sweet, a grade of crude oil used as a benchmark in oil pricing.)We expect the impact of lower carload volumes to result in an approximate 2% lower revenue growth for the year as compared to prior guidance, and the combined impact of further foreign exchange rate deterioration and lower fuel surcharge revenues to be an additional approximate 2% reduction in revenue growth as compared to prior guidance.”
KCS added that it “expects the impacts of foreign exchange and fuel surcharges to be largely offset with lower expenses; however, the impact of lower carload volumes is expected to reduce operating income. We are changing our guidance for linehaul revenue growth in the Energy commodity group from double-digit growth to single-digit growth for 2015. Linehaul revenue growth for all other commodity groups, overall carload growth, and capital expenditures are all expected to be in line with previous guidance.”
KCS also provided first-quarter 2015 expected results: “As initially discussed in early March at investor conferences, lower crude oil and natural gas prices are contributing to an expected approximate 10% decline in first quarter 2015 energy revenues. Due to the continued uncertainty in the energy markets with the recent decline in crude prices to six-year lows, we believe crude oil growth for 2015 will be lower than expected. Additionally, lower natural gas prices continue to have a negative impact on our coal business, resulting in an expected approximate 20% decline in coal revenues during the first quarter of 2015. We are also experiencing lower than expected frac sand and metals revenues related to a significant decline in new drilling operations in the U.S.
“As a result of the slower-than-expected carload growth, the first quarter 2015 revenue is approximately flat quarter to date to 2014,” KCS said. “Foreign exchange and fuel surcharge revenues are expected to negatively impact first-quarter 2015 revenues by approximately 4% compared to first quarter 2014. Additionally, first-quarter 2015 adjusted diluted earnings per share is expected to be flat to slightly higher than first-quarter 2014.”
“KS’s guidance reduction highlights several risks that the overall rail sector currently faces,” noted Cowen & Co. Managing Director and Railway Age Contributing Editor Jason Seidl. “Low natural gas prices have reversed the decline in utility coal stockpiles, contributing to sharp coal traffic declines in recent weeks, with the commodity down about 2% QTD on the North American Class I’s. Low oil prices have pressured crude shipments and reduced fuel surcharge revenues; and agricultural products face tough comparisons. Canadian carriers may be in a better position to face these headwinds in the near term due to the relatively low coal exposure (8% of total traffic for CN and 12% of total traffic for CP, compared to 19% of traffic for aggregate U.S. traffic) and a favorable currency environment. On the bright side for the industry as a whole, intermodal, which constitutes 43% of total traffic, is experiencing a recovery, as North American ports work to catch up on shipments delayed during several months of labor slowdowns at West Coast ports, and service metrics continue to improve.”