Kansas City Southern Inc.KSU

Morningstar Rating

Stock Research and Analysis

by Keith Schoonmaker

Kansas City Southern has a wider range of possible outcomes than other Class I railroad investments, but we believe this smaller rail holds significant potential for revenue growth and margin enhancement. Our interest in KCS would increase if the firm Read more

Bulls Say

KCS is developing a significant intermodal franchise. Access to Mexican ports, including Veracruz and Lazaro Cardenas (opened November 2007) and its 50% ownership of the Panama Canal railway, are well placed to carry containers bound for Mexico and the U.S.

The firm is improving track quality on its Meridian Speedway running from Shreveport, La., to Meridian, Miss., via a partnership with Norfolk Southern NSC. This lane shaves a day off the eastbound trip intermodal traffic.

In Mexico, the firm receives higher rates and pays less for fuel, so the Mexican operating ratio is several percentage points better than that produced by the U.S. operations. Mexican rail assets connect several ports to highly populated areas, including Mexico City.

Investors in KCS receive a buyout option. The firm's assets, stretching south into Mexico, would make an attractive addition to other railroads' networks, particularly those of BNSF BNI, Union Pacific UNP, or Canadian National CNI.

Automobiles and auto parts, appliances, and beer produced in Mexico generate attractive rail freight volume for NAFTA trade with the U.S., particularly given the higher rates in the Mexican market. Read more

Bears Say

Half of the firm's revenue is derived from operations to which the firm gains access via concession, not ownership. Should political or economic conditions falter in Mexico or Panama, operations could be at risk of expropriation or unfavorable changes in terms.

The company's hefty debt load and preferred stock dividends siphon cash and expose the firm to more financial risk than present in other railroads.

KCS hauls a diverse mix of freight, but compared to other U.S. railroads, the firm hauls a small proportion of less-cyclical coal (11% of firm revenue).

Unlike trucking firms, railroads must purchase and maintain their road. We project KCS' required maintenance capital expenditures will consume around 18% of revenue annually. Read more

Strategy

KCS increases revenue by raising rates and applying fuel surcharges. Numerous initiatives to boost speeds and shorten routes should drive down costs and attract speed-sensitive volume. KCS has developed Read more

Management

Chairman and CEO Michael Haverty has held the reins since 2000. The present Mexican-U.S. configuration of this railroad is Haverty's brainchild. Total CEO compensation is significantly lower than at larger railroads, but at $3.5 million during 2008 Read more

Profile

Kansas City Southern, the smallest Class I railroad, derives half its $1.8 billion revenue on 3,200 miles of track in the central and southern U.S. Remaining sales are produced Read more

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