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

In the first quarter, Union Pacific Corporation (NYSE:UNP) has returned around $394 million in cash to shareholders by repurchasing 2.9 million shares at an average price of $136.58, pushing up the cumulative share repurchases of 94.5 million shares since 2007. There are still 12.2 million shares remaining under current authorization. If the company completed all of these share repurchases in the next 18-24 months, the total buyback yield at the current price should reach as high as 26%. For the full year, the company expected to improve its network efficiencies and experience continued gains in core pricing. The dividend yield is quite decent, at 1.8%.

Canadian Pacific Railway Limited (USA) (NYSE:CP) also has a much lower valuation than Kansas City. At $120.40 per share, Canadian Pacific Railway Limited (USA) (NYSE:CP) is worth around $21 billion. The market values the company at 15.36 times its forward earnings. Most of its freight revenue, around 41% of the total freight revenue, were generated from Bulk (including grain, coal, fertilizer and sulphur), while Merchandise and Intermodal represented around 34% and 25%, respectively, of the total 2012 revenue. For the full year 2013, the company expected to experience high single digit revenue growth and the EPS growth of more than 40%. The company also intended to increase its capital expenditure by $75-$100 million to upgrade signaling systems on the Moose Jaw to Chicago corridor, improve track work on North Main Line and acquire core assets to make the balance sheet stronger. At the current price, the company offers shareholders a dividend yield of 1.1%.

My Foolish take

Kansas City is quite expensive at the current price. However, the company seems to deserve it with its railroad leading position in Mexico. According to Barron’s, the company could be considered a long-term opportunity on Mexico and crude-oil transport upside. It is estimated to reach $130 per share in a year, and it also could be a potential buyout candidate for the much bigger guys like Union Pacific Corporation (NYSE:UNP) and Canadian Pacific Railway Limited (USA) (NYSE:CP).

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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