Kansas City
Southern
(
KSU
) is one of the foremost freight rail transportation companies.
It functions in a seller's market and has enjoyed 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 maintaining a substantial profit
margin.
Additionally, improving cross-border traffic between the U.S.
and Mexico and 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
growth.
Kansas City Southern looks forward to mid-single digit growth
in volumes and core pricing. In terms of the Energy segment,
management projects double-digit growth this year based on
growing demand for natural gas and crude oil supplies. In
addition, the increase in frac sand shipments on enhanced
drilling activities in petroleum products and existing low cost
natural gas will drive shipments in this segment.
Auto production is expected to rise in Mexico, with upcoming
plants by Honda, Mazda, Nissan and Audi. These facilities will
expedite automotive shipments. Based on these proposed expansion
plans, finished vehicle production is expected to reach 3.5
million units in 2015; up about 40% from the 2011 production
level and 30% from the current level.
However, the current volatility in the 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.
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 Asian countries.
Additionally, the company foresees a decline in its grain
shipments, given higher U.S. grain prices. Although lower fuel
prices are a plus, it also means lower fuel surcharge revenue for
the company. Going forward, exchange rate fluctuations also
remain 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
(
CP
), increased railroad regulation and 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).
CDN PAC RLWY (CP): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis
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