Despite volatility in demand stemming from the ongoing economic
) continues to post strong year-over-year growth backed by a
favorable pricing environment. We remain encouraged by the
company's segment performance and look forward to accelerated
growth, particularly in Intermodal, export coal and automotive
shipments. We believe CSX will deliver volume growth above GDP
levels, in parallel with pricing above inflation.
Kansas has taken pricing actions that have led to average
pricing gains of nearly 4-5% per annum, enabling it to maintain a
double-digit profit margin. Apart from strong pricing fundamentals,
we believe that an improvement in business volumes and effective
cost-control measures also remain catalysts for the company's
Additionally, improving cross-border traffic between the U.S.
and Mexico and emerging business opportunities in the Mexican
market supported by its cheap labor cost will boost the company's
Over the last few quarters, Kansas has significantly benefited
from positive rail industry fundamentals supported by truckload
conversion to rail. Additionally, several cost control initiatives
have led to operating ratio improvement. As a result, management
expects to post consistent operating ratio improvement, taking its
U.S. operating ratio down to approximately 78.0% over the next 3-5
In Mexico, the company targets a sustainable operating ratio in
the high 60% range, primarily driven by the significant cost
differential among employees. Despite the ongoing economic
uncertainty, management remains committed to achieving an operating
ratio in the low 70s over the long term.
Going forward, the company has also taken significant steps to
improve its balance sheet position by decreasing leverage and
extending debt maturities. In 2011, the company completed debt
refinancing of $200.0 million, which extended debt maturities and
reduced future interest expense.
Further, it redeemed the remaining $123.5 million principal
amount of the 13.0% Senior Notes that translated into reduced debt
carry over. In February, Kansas was granted a term loan for $275
million, maturing January 15, 2017. The company expects this loan
(carrying 1.25% interest rate) to reduce the interest rate burden
significantly, since it will be used for redeeming debt worth $275
million, carrying an 8% interest rate.
However, the company faces significant competition from various
transportation providers including railroad companies like
Canadian National Railway Company
) along with motor carriers that operate similar routes across its
service area and, to a less significant extent, barges, ships and
pipelines. Further, increased railroad regulation, highly unionized
labor and softness in construction-related markets affecting the
merchandise business may impede growth in the future.
The present volatilities in the fuel market are also expected to
create a cost headwind of approximately $15 million to $20 million
in the current year. Additionally, we believe that the weakness in
construction-related markets will continue to persist through this
year and hinder sales of forest products.
Consequently, we maintain our long-term Neutral rating on Kansas
City Southern, supported by a Zacks # 3 Rank (Hold).
CDN NATL RY CO (
): Free Stock Analysis Report
KANSAS CITY SOU (
): Free Stock Analysis Report
To read this article on Zacks.com click here.