The Kansas City Southern (NYSE: KSU) railroad is surprisingly successful. In fact, the railway claims to have generated record revenues in 3rd Quarter 2019.
Specifically, Stockrow reports the Kansas City Southern, achieved revenues of $747 million in 3rd Quarter 2019. Those revenues were up from $714 million in 2nd Quarter 2019 and $699 million in 3rd Quarter 2018.
Impressively, Stockrow estimates the Kansas City’s Southern’s revenues grew by 6.97% during 3rd Quarter 2019. In contrast, a press release places the revenue growth rate based on freight volume at 7%. Additionally, the Kansas City Southern estimates its 3rd Quarter revenues at $747.7 million based on freight volume.
Is US Mexico Trade Recovering?
I think the Kansas City Southern’s revenue growth shows US-Mexico trade is recovering from President Donald J. Trump (R-New York). To explain, the Kansas City’s main line runs between central Mexico and the American Midwest.
Trump is notoriously hostile to Mexico and Mexicans. Mr. Market; however, is learning that Trump’s ability to affect trade is small and that Trump could leave office in January 2021 or earlier.
Hence, investors could be better off reading financial reports rather than the political news. Once again, events justify Warren Buffett’s faith in capitalism and America.
Is there really a US-China Trade War?
Moreover, the Kansas City Southern’s success shows history could disappoint speculators betting on a US-China Trade war. Notably, the Chinese themselves are ignoring Trump.
First, Reuters reports Chinese buyers are increasing purchases of Brazilian soybeans. To explain, soybeans are China’s biggest agricultural import. Specifically, Chinese traders signed contracts for $50 million worth of Brazilian soybeans during the week of 14 October 2019. Meanwhile, the US Department of Agriculture admits the Chinese made no big soy purchases that week.
Second, Chinese Ministry of Commerce Spokesman Gao Feng told reporters his government will not consider a trade deal until the U.S. transfers all tariffs. CNBC reports Gao made the statement on Thursday, October 27, 2019.
I suspect the Chinese will ignore Trump until after the 2 November 2020 US presidential election. To explain, signing a trade deal new president can tear up in January 2021 is stupid.
A trade war could affect Kansas City Southern because one of its rail lines runs to the Pacific Coast port city of Lazaro Cardenas. Hence, the Kansas City Southern can haul Chinese merchandise to US cities. The lack of a US-China trade makes the Kansas City Southern’s future brighter.
Is the Kansas City Southern Making Money?
The Kansas City Southern (NYSE: KSU) is making some money from its railroads.
In particular, the KSU reported a gross profit of $515 million on 30 September 2019. That gross profit was up from $475 million on 30 June 2019, and $457 million on 30 September 2018.
Moreover, the Kansas City Southern reported an operating income of $282 for 3rd Quarter 2019. That number was up from $208 million in 2nd Quarter 2019 and $265 million in 3rd Quarter 2019.
Likewise, the net income of $180.2 million was up from $128.7 million in 2nd Quarter 2018; and $173.6 million in 3rd Quarter 2018. Hence, the Kansas City Southern is making a little more money from its railway.
How Much Cash is the Kansas City Southern Generating?
The Kansas City Southern is generating a little more cash from its business. However, I think the KSU’s margin of safety is low because of its low cash flows.
For instance, the Kansas City Southern reported a $316.8 million operating cash flow and a $167.4 million free cash flow on 30 September 2019. Those numbers were up from $268.5 million and $107.5 million for 2nd Quarter 2019.
Unfortunately, the KSU also reported capital expenditures of $149.4 million, a negative investing cash flow of -$166.2 million and a negative financing cash flow of -$136.3 million for 3rd Quarter 2019.
Why the Kansas City Southern will Sell Itself
Consequently, I estimate the KSU negative cash flows and capital expenditures were -$451.9 million last quarter. Finally, the KSU only had $61.6 million in cash and equivalents on 30 September 2019. That number was down from $107.1 million in September 2019.
Hence, the Kansas City Southern is not keeping much cash. Therefore, I cannot see how this railroad can survive as a standalone enterprise. I predict economic conditions will force the KSU to sell out to a larger company like Amazon (NASDAQ: AMZN), Berkshire Hathaway (NYSE: BRK.B), or the Union Pacific (NYSE: UNP) at some point.
Notably, Berkshire Hathaway bought a much larger railway the Burlington Northern Santa Fe during the last economic downturn. Interestingly, some observers including Warren Buffett and U.S. Senator Elizabeth Warren (D-Massachusetts) believe an economic crash is inevitable.
Tellingly, Berkshire Hathaway (NYSE: BRK.A) had $122 billion in cash in June 2019, Markets Insider reports. Some observers think the cash shows Buffett thinks a stock market crash is coming. Buffett is accumulating cash so he can buy companies at like the KSU at low prices after the crash.
Could Amazon Buy a Railroad?
Meanwhile, Amazon has entered the rail freight industry with branded freight containers, Railway Track & Structures reveals.
To explain, Amazon will use the containers to ship merchandise from China to its US fulfillment centers. I think Amazon could buy a railroad because the Everything Store already owns freight airliners, a trucking service, Amazon Freight, and a growing delivery service.
To elaborate, Jeff Bezos’ business model is to control every aspect of the distribution and transportation process. In that master plan, control over rail freight is a logical step. Like Berkshire Hathaway, Amazon is hoarding cash. The Everything Store had $41.463 billion in cash and short-term investments on 30 June 3019.
Is the Kansas City Southern a Value Investment?
I think Mr. Market grossly overpriced the Kansas City Southern (NYSE: KSU) at $145.85 on 23 October 2019. I could see nothing in the KSU’s financial numbers that justify that price.
Not even the quarterly dividend of 36₵ justifies the KSU’s share price. To clarify, I think the KSU’s dividend is unsustainable because of the small amounts of cash the company generates.
Nor do I think the 0.99% dividend yield, annualized payout of $1.44, and 20.95% payout ratio, Dividend.com gave the KSU on 23 October justify the stock price. I advise investors to stay away the KSU right now.
I think there are better investments in railroads, including the Union Pacific and Berkshire Hathaway. Those seeking stocks to short need to watch the KSU because I think it could collapse because of its low cash flow.