Company Review: Kansas City Southern (KSU)

Company Profile: Kansas City Southern (KSU) (obtained via Google Finance)

Kansas City Southern (KCS) is a holding company with principal operations in rail transportation. The Company, along with its subsidiaries and affiliates, owns and operates a North American rail network strategically focused on the north/south freight corridor that connects commercial and industrial markets in the central United States with certain industrial cities in Mexico. Its principal subsidiary, The Kansas City Southern Railway Company (KCSR), serves a 10-state region in the Midwest and southern parts of the United States and has a short north/south rail route between Kansas City, Missouri, and several ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas.
 

Business and Management Review
1) Is the business simple and understandable?

The business is basic and easy to understand as they move product(s) for customers and charge fees that represent revenue. The primarily operate in the north/south freight corridor, but also freight shipments internationally to Mexico.                                               

2) Does the business have a consistent operating history?

The company was founded in 1887 and found a market niche in establishing a north-south axis of rail lines, while competition was focusing on east-west. Today, Kansas City Southern is a holding company for the Texas Mexican Railroad Company, and Kansas City Southern de Mexico. Interesting enough, the founder envisioned in the late 1800’s to develop a rail network reaching from Kansas City, though the Gulf States, and finally into Mexico; he was proven correct in his analysis.

3) Does the business have favorable long term prospects?

As stated with prior analysis of the rail line industry, there are continued favorable prospects as long as companies continue to need to move product that is unsuitable for air or ground (highway) transport. Therefore, we believe the rail companies will continue to enjoy the success of years and centuries past. 

4) Is management rationale?

We find several reasons to be concerned of management’s decisions after analyzing this firm. In comparison to industry averages, KSU falls behind on key indicators. Gross margin, operating margin, and especially net profit margin are significantly below that of the industry. The five year average of return on equity is half that of their competitors, obviously there are problems. Startling is the amount of debt this company is carrying on their books. They debt/equity ratio stands at 1.12 compared to an industry average of 0.65. This raises concerns of over leverage within the company that further weakens them competitively. We are very concerned of these indicators.

5) Is management candid with its shareholders?

The company’s investor relation page is fully loaded with the data and features that are demanded by investors in the 21st century. Very interesting is speak up!, which is a feature for that explains how employees can report misconduct within the company. Every company should take these steps to enhance their corporate governance!

6) Does management resist the institutional imperative?

Given the data we have uncovered, we are concerned about management’s priorities.

Financial and Value Review
Defensive:

1) Size of firm

Market capitalization of the firm is over $2.2 billion passing KSU on this test.

2) Strong financial condition

Current ratio is below 2, at about 0.81. KSU fails this test.

3) Earnings stability

The firm has failed to generate positive net income for the past ten years which fails the test.

4) Dividend record

The company does not pay a dividend which fails this test.

5) Earnings growth

The company has failed to grow their EPS by one third over the past ten years, which fails this test as well.

6) Price to earnings analysis

The company’s trailing 12 month P/E ratio stands at roughly 39, which is significantly higher than the benchmark 20. KSU fails this test.

7) Price to book analysis

The P/B ratio for KSU is about 1.46 which is below the 2.5 requirement, therefore allowing the firm to pass this test.

Conclusion:

Scoring only 2/7, Kansas City Southern fails the overall test for the defensive investor.

Enterprising:
1) Strong financial condition

KSU fails this test, as the enterprising investor requires a current ratio below 1.5.

2) Earnings stability

The enterprising investor requires positive net income for five years prior and KSU fails to meet this requirement.

3) Dividend record

The company does not pay a dividend; failure is a result for this test.

4) Earnings growth

Earnings are greater than five years ago, which allows KSU to pass this test.

Conclusion:

Scoring 1/4, Kansas City Southern fails the overall test for the enterprising investor.

Valuation:

We find a fair market value for the firm to be around $26 per share.

Opinion:
The financial data present, combined with the failure of both tests results us steering clear of this security for both types of investors.

Neither of us held a position in KSU at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the third part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 – Jon – Burlington Northern Santa Fe (BNI)
Tuesday, January 9 – Ben – Union Pacific Corporation (UNP)
Wednesday, January 10 – Jon – Kansas City Southern (KSU)
Thursday, January 11 – Ben – Providence & Worcester Railroad Co (PWX)
Monday, January 15 – Jon – The Greenbriar Companies (GBX)
Tuesday, January 16 – Ben – Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 – Jon – Canadian National Railway (CNI)
Thursday, January 18 – Ben – Norfolk Southern Corporation (NSC)
Monday, January 22 – Ben – Overall Industry Analysis & Introduction of Next Industry

 


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