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No. of Recommendations: 8
From the guy that brought you such falling knives as VRX [Ouch!] and VOW [looks great if you price it at year-end!!] comes another fascinating sector pick in the highly innovative world of Rails![!!]

KSU is the smallest of the Class 1 railroads at $7.6bn. YoY earnings are going to fall ~13% for Q4, with revs down half of that.

For 2016, stock is at 14.8x pe FY16, a 3-4 year low. It is already trading below the last cycle's trough. 8.5x CFlo, and will have around 2% divy yield assuming another increase.
They report Jan 22nd, so, feel free to wait and see what they say.

The stock took a hit in Q3 after negative comments about its auto biz, considered a long-term growth driver and 10% of revenues. Since then it has been the worst name in the sector.

Analysts are 10/11/2 for B/H/S. Pretty bearish for the Street, even with a couple upgrades. 2016 EPS expected ~7.5% growth.

KSU trades at a 25% premium to peers in recent years. Why?

Its Mexico operations give it a unique network for Class 1, hitting Mexico City and both coasts. They run north-south rails. They have higher carload growth rates and mgmt outlook for operating expense is moving from high-60s to low 60s. Price hikes from the sector should come in at 3-4% the next couple of years.

They are increasing their potent intermodal franchise, which gives them strong growth potential, and also a takeover options since it's the only Class 1 that could be bought without significant regulatory opposition. In fact, if CP wanted to buy them there is absolutely zero overlap, and only meet at one junction in Kansas City. If CP mgmt drops their current pursuit, not hard to guess the next one.

What has hurt them - weak Mexican Peso. Energy markets, esp coal. The good news here is that coal has already dropped from 20% to 10%, so the continued decline hurts them less and less but that has been relative robust for them in Q4. Auto volumes are expected to be flat YoY due to re-tooling and expansion, but ramp up in a big way in 2017. The Peso fell 19% this year on average vs the USD, which was responsible for half their revenue drop thru Q3. Ags and minerals outlook is negative, frac sands, etc. FCF is low.

Intermodal is 15% of revs and 45% of traffic, but is growing at 15% versus other carload growth of 3%.

Things going right: truck conversions, Meridian Speedway line, Port expansion and their 50% JV in Panama Canal Rail which should accelerate volumes this year with expected completion of the Canal expansion. PCR connects the Colon and Balboa ports. Scrap metals should come in better this year. KSU Mexico has improved service, has new ability to run longer trains which are more profitable than in the US [higher price and lower costs vs shipping across US].

17% of volume is petrochem & forest products, no +/- catalysts there. Access to Gulf Coast terminals has ramped up and refined products can be moved into Mexico. KSU spends the most on CapEx at 30%+, but has been declining since it peaked in 2014.

So, an operational turnaround story here which would benefit from a weaker USD or stronger energy sector [not prices], and continued growth from the Mexican economy. If you believe USD will rise and energy will fall, you should avoid the stock. You may want to wait post-earnings to see if they get hammered again anyway.
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