Kansas City Southern (KSU), Union Pacific Corporation (UNP), Canadian Pacific Railway Limited (USA) (CP): A Long-Term Play on the Mexican Railroad

Page 1 of 2

In the past twelve months, Kansas City Southern (NYSE:KSU) has experienced significant gains on the market, heading from around $70 per share to $112.60 per share at the time of writing. At the end of 2013, Barron’s featured the company, thinking that Kansas City Southern (NYSE:KSU) could increase by around 20% in the next twelve months. So is Kansas City Southern (NYSE:KSU) cheap or expensive at its current price? Should investors buy the stock now? Let’s find out.

Kansas City Southern (NYSE:KSU)

Leading position in Mexico railroads

Kansas City Southern (NYSE:KSU) is an operator of domestic and international railroads in North America, connecting key markets in the central U.S. with big industrial cities in Mexico. One of its subsidiaries, Kansas City Southern de Mexico, S.A., the key commercial corridor of the Mexican railroad system between Mexico and Laredo, Texas, serves the main industrial cities in Mexico and three big seaports. Many investors might know Laredo, as it carries more than 50% of all rail and truck traffic between the U.S. and Mexico. Moreover, Kansas City Southern (NYSE:KSU) also owns several other railway businesses, including Mexrail, Pabtex and Trans-Serve. Around 24% of the company’s total revenue was generated from the Industrial & Consumer Products market, while the Agriculture & Minerals and Chemical & Petroleum markets each accounted for 18% of the total 2012 sales.

Consistent growth with a reasonable amount of leverage

In the past four years, Kansas City Southern (NYSE:KSU) has experienced consistent growth in its top line and bottom line. Revenue increased from $1.48 billion in 2009 to more than $2.2 billion in 2012, while the net income rose from $68.1 million, or $0.60 per share to $379.4 million, or $3.43 per share during the same period. Kansas City is also considered a good cash generator. In 2012, its operating cash flow was $673 million and its free cash flow was $133 million.

What I also like about Kansas City is its strong balance sheet, which has a reasonable amount of leverage. As of March 2013, it had $3.18 billion in equity, $64 million in cash, and around $1.6 billion in debt. The company is trading at $112.60 per share, with a total market cap of $12.40 billion. The market seems to value Kansas City quite expensively, at 22.3 times its forward earnings.

But it was much more expensive than its bigger peers

Compared to its peers including Union Pacific Corporation (NYSE:UNP) and Canadian Pacific Railway Limited (USA) (NYSE:CP), Kansas City looks quite expensive. Union Pacific Corporation (NYSE:UNP) is trading at $157.50 per share, with a total market cap of around $73.5 billion. The market values Union Pacific Corporation (NYSE:UNP) at a much lower valuation than Kansas City, at 14.45 times its forward earnings. In the first quarter of 2013, around 20% of Union Pacific Corporation (NYSE:UNP)’s freight revenue was generated from Intermodal, while Coal and Industrial stayed behind, accounting for 19% and 18%, respectively, of the total revenue.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!