Has Kansas City Southern Turned Around?

Cross border trade with Mexico seems to be flourishing despite President Trump’s dislike for that country. Revenues have started to rise at the Kansas City Southern (NYSE: KSU) the railroad that connects the American Midwest with our neighbor to the South.

The Kansas City Southern; or KSC, reported its first quarter of revenue growth since 2014, on March 31, 2017. The railroad reported revenues of $2.334 billion in December 2016; that grew to $2.381 billion on March 31, 2017. This amounted to a modest increase of $38 million.

This was still below the KSC’s peak revenues which were achieved in December 2014. Naturally, many people will wonder if this is the start of a turnaround and a sign that recent reports of renewed economic growth are for real. The Kansas City Southern is a pretty good barometer of economic growth because it connects the Midwest with Mexico’s industrial heartland and the Pacific Coast port of Lazaro Cardenas.

Is the Kansas City Southern Making Money?

The best way to answer such questions is to check the financial numbers and see if the KSC is making money. Here’s what ycharts’ financial data told me about the railroad’s performance for first quarter 2017:

• The net income is growing; rising from $479.10 million in December to $516.9 million in March a new high.

 

• The profit margin is good at 24.05% this was up from 21.65% in last quarter 2016.

 

• The company is struggling with a negative free cash flow of -$30.5 million. This number was down $101.2 million from December when it was $70.7 million which indicates some serious losses or operating expenses.

• Cash from operations was pretty good at $882.90 million. This was down slightly from $913.3 million but indicates Kansas City Southern makes some money.

 

• The railroad’s float is limited it reported cash and short-term investments of just $123.1 million and assets of $8.878 billion on March 31, 2017. Cash and short term investments fell from $170.10 million in December, another sure sign of high operating expenses.

 

These numbers indicate that the economy is still pretty soft and the KSC is still struggling with high expenses and declining revenues. My guess is that revenue gains are coming from transpacific shippers looking for an alternative to strike-prone and traffic clogged United States ports such as Los Angeles.

Is Kansas City Southern a Good Investment?

The financial numbers show us that Kansas City Southern is not a good investment despite the 12.76% return on equity on March 31, 2017. I’m making this assertion for three reasons:

1. The railroad is definitely overpriced at the $89.5 a share it was trading at on April 28, 2017. There’s nothing in the earnings report to justify that number.

2. We still do not know the details of the Trump trade policy, or how relations with Mexico will pan out. During the election campaign Donald promised his voters a 35% tariff on some Mexico products something that has not occurred. That idea might be dead but Trump and his crew are still talking about the Wall, which will not go down very well in Mexico or at KSC’s offices.

 

3. Trump and Congressional Republicans were toying with the idea of a border adjustment tax – a 20% tariff on many imports. The idea is supposedly dead, The Business Insider reported, but I would not be surprised if it were to be revived, because of the potential of raising $2 trillion a year in revenues.

Any new taxes on Mexican imports would probably cut into KSC’s freight volume, which the railroad definitely does not need. Even rumors of such levies might send Kansas City Southern stock falling.

Therefore you should stay away from KSC stock until we find out what the Trump trade policy will be and if it has any Congressional support. The 33¢ dividend this stock paid on March 9, 2017, simply does not outweigh the potential risks from possible changes to trade policies.