The Railroad Everybody Forgets About: Kansas City Southern

A few weeks ago I was having a short chat with the nice lady at the post office when mentioned that her father had once worked for the Kansas City Southern (NYSE: KSU). What was truly interesting was that she was convinced that the railroad was no longer in business.

She was rather surprised when I mentioned that the Kansas City Southern is not only still operating but actually making money. I imagine she is not the only one, because the Kansas City Southern is the one U.S. railway everybody seems to forget about.

For those who are unfamiliar with it, the Kansas City Southern is one of three U.S. railroads that connect the Pacific Coast with the Midwest. The others are the Union Pacific (NYSE: UNP) and the Burlington Northern Santa Fe, now part of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) empire. The difference is that the Pacific Coast ports the Kansas City Southern connects to are in Mexico.

The truly intriguing thing about the Kansas City Southern from a value investor’s standpoint is the assets it has collected. The KCS’s impressive holdings include:

• The Kansas City Southern Railway Company, or KSCRC, a Class One Railroad that operates 3,500 miles of track in 10 states. Among other things, it owns the shortest route between Kansas City, the second largest rail hub in the USA, and the Gulf of Mexico.

 

• Kansas City Southern de Mexico, S.A. de C.V. or KCSM, a railway with 3,100 miles of track that connect Mexico’s industrial heartland with the USA. It also provides a direct connection to the Pacific Coast port city of Lazaro Cardenas. It also provides connections to the Gulf Coast Mexican ports of Veracruz and Tampico.

 

• The Texas Mexican Railway or TexMex, which connects the KCSM’s track to the KCSR.

 

• The Panama Canal Railway Company, which operates the railroad running along the Panama Canal.

 

Basically, the Kansas City Southern is a major railroad with operations that could potentially rival those of operators like the UP. It is also a very profitable company from a value investment standpoint. Some of the KCS’s financial numbers include:

• A quarterly TTM revenue of $2.57 billion on Dec. 31, 2014, up from $2.369 billion in December 2013.

• A gross profit margin of 23.8%.

 

• A diluted TTM EPS of 4.556%.

 

• A dividend yield of 1.15%.

 

• An enterprise value of $15.08 billion.

 

• A market cap of $12.65 billion.

 

• A return on equity of 14.18%.

 

From these numbers, the Kansas City Southern looks like a classic value play. Although, its share price is a little high; it was $114.59 on March 17, 2015. The fascinating thing is that the KCS might be undervalued because of the assets it has in Mexico.

Port Labor Strife Is KCS’s Opportunity

The assets are the connections to the port of Lazaro Cardenas on the Pacific and the track that connects it to Kansas City. The Kansas City Southern has a direct connection between those ports and America’s heartland.

That could be very valuable these days because of the situation on the West Coast, where tensions between the International Longshoreman’s Association (ILA) and ship operators shut down ports. The dispute could disrupt America’s economy because 40% of U.S. foreign trade goes through those ports.

Get the picture, folks; Kansas City Southern has a direct connection to a port the Pacific where there is no ILA. It is the one U.S. railroad that could bring in imports from Asia if the ports on the West Coast shut down. Basically, the KCS is the one US-based railroad that can do an end run around the West Coast ports.

That means a lot more business is likely to be coming KCS’s way next year if the labor disputes on the West Coast continue. Shippers, especially those in retail and other time-sensitive industries, will be more likely to choose the KCS.

Mexican Auto Boom

Port labor strife is not the only windfall coming the Kansas City Southern’s way. Mexico is poised to become the biggest exporter of cars to the United States, according to our friends at Bloomberg. Cars are shipped from factory via rail, and 1.9 million of them could be shipped from Mexican factories to U.S. dealerships this year, according to HIS Automotive.

Some popular models, including the Honda Fit and the Nissan Sentra, are made in Mexico. The Mexican auto industry is growing, and its production could reach four million vehicles by 2018. Kansas City Southern has tracks running right into Mexico’s industrial heartland and offers seamless crossing at the U.S.–Mexico border; it is in the perfect position to take advantage of the boom.

To add some icing to the cake Kansas City Southern, is also in an excellent position to ship Mexican vehicles for export outside of North America. Its tracks to Veracruz, Lazaro Cardenas, Tampico, and Houston could be used to ship to vehicles from the factories to the ports.

It looks as if Kansas City Southern is one railroad that is poised to grow. If you are looking for a value investment on the rails, check out the Kansas City Southern.