Kirby Corporation: Q4 Earnings Preview

Kirby Corporation (KEX), a leading provider of domestic tank barges in the United States, is set to report its fourth quarter earnings after the market close on February 1, 2024. The company has been a strong performer in recent years, with its stock price appreciating significantly due to robust earnings growth and expanding cash flows. Kirby's marine transportation and distribution and services segments have both contributed to the company's success, driving investors to pile into the trade. As the company approaches its earnings release, let's take a closer look at what investors can expect.



Price movements since last quarter
Kirby's Q3 beat ($799.2 million in revenues vs. $730.2 million consensus; $1.04 EPS versus $0.62 consensus) has sent the stock soaring in the previous quarter. Since Kirby's last reporting date (October 26, 2023), the stock is up 15% and has reached new all-time highs.



It's worth noting that Kirby's valuation has climbed to historical highs at 7.5-7.6x revenues, as the company's top-line growth hasn't kept pace with increases in the stock. Kirby is now also one of the most generously valued stocks in the large-cap industrials space, exceeding even some of its peers. When Kirby was trading under ~6x earlier this Spring, it was a clear buy, but now, the risk/reward profile in the stock is no longer compelling.

Another fact worth mentioning: Kash Rangan, the star Bank of America (BAC) analyst who was named #1 in the powerful Institutional Investor ranking in the industrials sector in 2014 (and is an annual favorite on the list), has recently downgraded Kirby with a $115 price target, citing valuation concerns.

Guidance, expectations, and what to watch for
Here's what the Street will be expecting in Kirby's fourth quarter:
- Revenue: Kirby guided to $800-810 million in revenues (+15% to +16% y/y) for the fourth quarter. Wall Street consensus, as reported by Yahoo Finance, is looking for $805.1 million in revenue (+15.5% y/y). Note that it's fairly rare for analyst consensus to fall outside of management's guidance range, so this quarter could be a tough one for Kirby to exceed.
- Operating margin: Kirby is guiding to a GAAP operating margin of 15.1%, down sequentially from 18.6% in Q3, but up 210 bps from 13.1% in 4Q16 (note, however, that 4Q16 was Kirby's biggest quarterly miss).
- Earnings: Kirby guided to $1.04 in GAAP EPS and $1.55 in pro forma EPS. Analysts are calling for $1.55 in pro forma EPS.

It's worth noting that Kirby has done exceptionally well this year, so it's not like the rise in the stock price is unjustified. Revenues year to date have grown 11% to $3.09 billion, as shown in the tables below - and most of that growth is coming from increases in marine transportation and distribution and services revenues.



The question is, with the Street expecting consistent 15% growth for Kirby, is it possible for the company to keep growing at such a steady double-digit rate despite its massive ~$3 billion revenue scale? As I wrote last quarter, Kirby's marine transportation segment, which accounts for a significant portion of its revenues, has been a key driver of growth. However, the segment's growth rate may eventually taper down as the company's scale increases. Analysts will be watching for growth in Kirby's distribution and services segment in Q4, which posted 12.7% y/y growth in Q3. Growth in this segment will be critical to sustaining a revenue growth rate above 15% for Kirby, especially as marine transportation's growth has slipped to 7.1%. Any significant deceleration in distribution and services products will be a major red flag to investors, as this product line is underpinning a bullish growth thesis in 2024.

Cash flow will be the other major item to scrutinize, though Kirby doesn't explicitly guide to cash flow, and analysts don't put out a consensus figure on it. Kirby's operating cash flows are one of the major draws to investing in the company - OCF in Q3 grew 20% y/y to $143 million. Sustaining this ultra-high growth in cash flow will be a critical indicator for Kirby in Q4, which may be difficult as Kirby is guiding to ~300bps of operating margin decline sequentially.

60-second summary
The key sound bite to take from this discussion: positive read-through from other industrials companies supports a good earnings quarter for Kirby. However, given that analyst expectations are already on the high side of Kirby's guidance, it may be a smaller beat than usual, and in this environment - when reactions to industrials earnings are mixed, and when Kirby's stock is trading at sky-high valuations - a small beat may be met with a selloff. Q4 is typically Kirby's bogeyman quarter, and though two years of Q4 misses don't make a definitive trend, I'd definitely be careful on Kirby ahead of earnings this week. If not for its valuation, I remain fundamentally bullish on Kirby as a fantastic company and industry leader, but at current levels, I'm inclined to back away and take profits on the trade, as will many other investors.