Kansas City Southern
) is one of the oldest and foremost freight rail transportation
companies. It functions in a seller's market, enjoying pricing
power since 1980 when the U.S. government formulated the Staggers
Rail Act. The company has been able to increase prices on
average by nearly 4%-5% per annum thereby, subsequently maintaining
a substantial profit margin.
Additionally, improving cross-border traffic between the U.S.
and Mexico and emerging business opportunities in the Mexican
market supported by its cheap labor costs, favorable currency
environment and lower transportation cost to the U.S. markets are
expected to bode well for the company's top and bottom-line
Kansas City Southern looks forward to a mid-single digit growth
in volumes and core pricing in 2012. In terms of the Energy
segment, management projects a double-digit growth this year based
on a rising demand for natural gas and crude oil supplies. In
addition, increase in frac sand shipments due to enhanced drilling
activities in petroleum products and existing low cost natural gas
will drive higher shipments in this segment.
Auto production is expected to rise in Mexico, with upcoming
plants set up by Honda, Mazda, Nissan and Audi. These facilities
will facilitate greater automotive shipments. Based on these
proposed expansion plans, finished vehicle production is expected
to reach 3.5 million units in 2015; about 40% higher than the 2011
production levels and over a 30% increase from current levels.
However, the current state of a volatile U.S. and world economy
may keep Kansas City Southern's top-line growth under pressure in
the near future. Moreover, near-term growth for the company is
expected to be tempered by lower coal production forecasts by the
U.S. Energy Information Administration. Besides, lower natural gas
prices and a weak utility coal market have raised serious concerns
and limited overall coal shipments despite strong exports to the
Additionally, the company foresees a decline in its grain
shipments, given higher U.S. grain prices. Going forward, the
company expects fuel prices for the remainder of the year to
decline by around 10% in the U.S. and 2% in Mexico. Although lower
fuel prices should benefit operating expenses, we believe it will
also adversely impact fuel surcharge revenues of the company. Going
forward, exchange rate fluctuation also remains a critical factor
for the company's earnings, as a substantial part of the business
arises from cross-border markets. Given these near-term headwinds,
the company lowered its revenue estimates for this year to a
mid-single digit range from a low-double digit range.
Further, stiff competition from railroads like
Canadian Pacific Railway Limited
), increased railroad regulation, highly unionized labor may limit
the upside potential of the company.
Consequently, we maintain our long-term Neutral recommendation
on the stock. For the short term, Kansas City Southern holds
a Zacks #3 Rank (Hold).
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KANSAS CITY SOU (KSU): Free Stock Analysis
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