Will Trump destroy the Kansas City Southern?
Strangely, President Donald J. Trump (R-New York) is able to destroy the Kansas City Southern (NYSE: KSU). The Kansas City Southern is the railway sometimes called the KSC.
Trump can destroy the Kansas City Southern because the KSC is a cross-border railroad. To explain, the Kansas City Southern operates large amounts of track on both sides of the U.S. Mexico border.
In fact, the KSC’s main Pacific port is Lazaro Cardenas, Michoacán. Thus, if Trump made good on his ridiculous threats to close the border, he could block the Kansas City Southern’s port access. In detail, Trump threatened border closure to force Congress to finance his unpopular border wall scheme.
Thus Trump can destroy the Kansas City Southern or damage its operations severely. Plus, Trump could quickly sink the KSU’s stock price because I base the railroad’s value on its cross-border operations.
The Kansas City Southern (KSU) has growing revenues
Ironically, Trump’s actions could end seven straight quarters of revenue growth at the Kansas City Southern.
For instance, the KSC records a revenue growth rate of 6.46% for 3rd Quarter 2018. Specifically, the Kansas City Southern has experienced revenue growth for every quarter since 1st Quarter 2017.
Trump could destroy the Kansas City Southern because its revenues are small despite the impressive growth rate. For example, the KSC records revenues of $699 million for 3rd Quarter 2018 and $682 for 2nd Quarter 2018.
Thus, the KSC could collapse after two quarters of revenue losses. The railroad is vulnerable to political catastrophes like the government shutdown.
The Kansas City Southern is making money
Hence, President Trump, a self-proclaimed prince of capitalism, could destroy a profitable company with his clumsy policies.
Notably, the Kansas City Southern is making money from its organizations. In detail, the KSC made a gross profit of $457 million, an operating income of $265.4 million, and a net income of $173.5 million for 3rd Quarter 2018. Moreover, the Kansas City Southern records an operating cash flow of $280 million and a free cash flow of $152 million for 3rd Quarter 2018.
However, Trump’s policies could threaten all that because the KSC’s resources are very limited. For instance, the Kansas City had just $107.10 million in cash and equivalents on 30 September 2018.
Consequently, a few weeks of border closure drive the KSC into bankruptcy. If there is a closure, I have to wonder how Trump will justify his behavior to the Kansas City Southern’s employees and stockholders.
Will Trump kill the Kansas City Southern’s Dividend?
Obviously, the Kansas City Southern’s dividend is among the things a Trump border closure could threaten.
Notably, the Kansas City Southern paid a dividend of 36¢ on 16 January 2019. Specifically, the KSC offers investors a dividend yield of 1.4%, an annualized payout of $1.44 and a payout ratio of 23.7%. Moreover, the KSC has achieved five years of dividend growth.
However, events on the border and President Trump’s erratic behavior threaten the KSC’s growth. Yet despite those threats, the Kansas City Southern could be a value investment.
Is the Kansas City Southern a Value Investment?
The Kansas City Southern is a potential value investment because operates a piece of critical infrastructure other companies cannot function without.
To explain, corporations that operate factories in Mexico need the KSC’s railway to ship goods. In addition, other companies need the KSC to export goods.
On the other hand, I think Mr. Market grossly overpriced the KSC at $101.86 a share on 16 January 2018. The KSC is too high because political turmoil in the US and violence in Mexico threaten its operations.
For example, the port of Lazaro Cardenas is notoriously gang-infested. Notably, The Wall Street Journal claims gang bosses run the city. However, the gangsters do not seem to affect rail operations.
Thus, the KSC is highly vulnerable to outside Black Swan events like political chaos in Washington or Mexico City. The reliance on US-Mexico trade; in particular, is dangerous given the current political climate.
Why Trump makes the Kansas City Southern an interesting long-term investment
However, the KSC could be a good long-term investment because of Trump. To explain, Trump could totally discredit the whole anti-trade agenda with his nihilistic behavior.
In fact, Trump’s antics could make anti-trade rhetoric and policies, so toxic no politician will touch them. Interestingly, Trump has already partially done this by linking trade to racism and white nationalism.
Thus Trump could inadvertently create a political environment that is friendlier to trade. Obviously, such a political environment could make it easier for the KSC to operate and expand operations.
Hence, investors looking for a railway stock for a long-term buy and hold play should investigate the KSC. However, I would recommend holding off on buying Kanas City Southern (NYSE: KSU) until its share price falls and the political environment stabilizes.
No matter what the political situation, the market overpriced the KSU at $110.52 a share on 18 January 2019. Only a much lower price can justify a purchase of Kansas City Southern right now.
