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Kansas City Southern: Buy the Dip?

kansas city southern de mexico railroad locomotive
(Paul Brady/Dreamstime)

By    |   Wednesday, 19 December 2018 01:26 PM

Fears of slowing global economic growth have held the stock market down in 2018. With the S&P 500 Index down about 4% year-to-date, investors are starting to worry about the possibility of an upcoming recession.

Railroad stocks in particular are often viewed as a bellwether for the global economy. A recession would be a significant challenge for the nation’s railroads. As a result, Kansas City Southern (KSU) shares have declined 10% so far in 2018. But Kansas City Southern continues to execute on its growth plan. With the stock valuation on the decline, the recent dip could be viewed as a buying opportunity.

Growth Remains On Track

Kansas City Southern has a rail network consisting of nearly 6,700 miles of track that connects the U.S. Midwest and South to Mexico and ports along the Gulf of Mexico. The company’s annual revenue is roughly split between the U.S. and Mexico operations. Kansas City Southern generated $2.6 billion of revenue last year, and the stock has a market capitalization of $10 billion.

The company had another solid performance last quarter. Revenue increased 6% in the most recent quarter, due to 4% volume growth thanks largely to the cross-border franchise. Kansas City Southern earned $1.57 per share, up 16% from the same quarter last year.

Coal continues to be a weak spot for the company. Utility coal carloads fell 25% last quarter, as the nation continues to shift away from coal and towards other energy sources such as natural gas and renewables.

However, Kansas City Southern has effectively managed its portfolio by reducing its exposure to coal. As a result, the decline from coal was more than offset by growth in other areas. Revenue per unit for Kansas City Southern’s energy shipments rose 7% last quarter, due to a 223% increase in crude oil sales. And, the company’s chemicals and petroleum segment grew revenue by 17%, thanks to a 15% increase in carloads.

Double-digit earnings growth is a clear indication that the business continues to perform well. Investor sentiment has become more negative throughout 2018, but Kansas City Southern is still in strong financial condition.

Investors Hit The Brakes, But KSU Remains A Buy

The weak performance of the U.S. stock market has spooked investors. And while railroads are economically-sensitive businesses, the U.S. economy continues to expand, which bodes well for railroads. Going forward, Kansas City Southern has a positive growth outlook. Volumes are expected to grow this year, led by the Intermodal and Automotive businesses. Multiple automobile manufacturers, such as Toyota and Mercedes, are opening new manufacturing plants in Mexico. Vehicles manufactured in Mexico will be sold in the U.S., and therefore will need transportation. This will naturally benefit Kansas City Southern, as its north-south network connects the U.S. and Mexico.

Kansas City Southern shares trade for a price-to-earnings below 16, which makes it one of the cheapest stocks in the railroad industry. With a strong rate of earnings growth, Kansas City Southern stock could be a buying opportunity.

The combination of a rising stock valuation, the company’s earnings growth, and its dividend (which currently yields 1.5%) could fuel annual returns above 10% per year for Kansas City Southern investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Kansas City Southern shares trade for a price-to-earnings below 16, which makes it one of the cheapest stocks in the railroad industry. With a strong rate of earnings growth, Kansas City Southern stock could be a buying opportunity.
kansas, city, southern, buy, dip
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2018-26-19
Wednesday, 19 December 2018 01:26 PM
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