Analyst Note| Matthew Young, CFA |
Wide-moat Kansas City Southern’s third-quarter top line rose 6% year over year (excluding fuel and foreign exchange impacts), mostly due to favorable mix shifts (including slower intermodal activity) and positive core pricing. Revenue came in slightly below our expected run rate. While underlying industrial end market demand in the U.S. remains healthy (U.S. carloads rose 6%) and coal saw an uptick, consolidated carload volume declined 3%. Lower volume stems from softer automotive carloads linked to the semiconductor shortage, regulatory-related headwinds to refined product volumes heading into Mexico, and network interruptions from persistent teacher-protests on a corridor between Lazaro Cardenas and Mexico City. Production slowdowns and shutdowns among the auto OEMs is taking longer than expected to resolve because of the stubborn chip shortage, but management expects the issues in Mexico to gradually ease (albeit timing is uncertain).