Kansas City Southern Analysis – August 2015 Update $KSU

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Kansas City Southern (KSU) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Kansas City Southern (KCS) is a transportation holding company with domestic and international rail operations in North America that are focused on the north/south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico. The Company’s rail network includes The Kansas City Southern Railway Company (KCSR), which serves a ten-state region in the midwest and southeast regions of the United States and has the shortest north/south rail route between Kansas City, Missouri and several key ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas; Kansas City Southern de Mexico, S.A. de C.V. (KCSM), which serves Mexico’s principal industrial cities and three of its major seaports, and Mexrail, Inc. (Mexrail), which owns The Texas Mexican Railway Company (Tex-Mex), which connects the operations of KCSR with KCSM.


To read the rest of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.


Downloadable PDF version of this valuation:

ModernGraham Valuation of KSU – August 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end Pass
6. Moderate PEmg Ratio PEmg < 20 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg 3.89
MG Growth Estimate 15.00%
MG Value $149.89
Opinion Undervalued
MG Value based on 3% Growth $56.45
MG Value based on 0% Growth $33.09
Market Implied Growth Rate 8.28%
Current Price $97.59
% of Intrinsic Value 65.11%

Kansas City Southern is not suitable for the more conservative Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, inconsistent dividend record, and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.92 in 2011 to an estimated $3.89 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.28% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Kansas City Southern (KSU)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

KSU charts August 2015

Net Current Asset Value (NCAV) -$32.94
PEmg 25.07
Current Ratio 0.75
PB Ratio 2.77
Dividend Yield 1.25%
Number of Consecutive Years of Dividend Growth 4


Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $523,500,000
Total Current Liabilities $701,200,000
Long-Term Debt $1,828,500,000
Total Assets $8,052,300,000
Intangible Assets $0
Total Liabilities $4,164,200,000
Outstanding Shares 110,515,000

Earnings Per Share History

Next Fiscal Year Estimate $4.16
Dec14 $4.55
Dec13 $3.18
Dec12 $3.43
Dec11 $3.00
Dec10 $1.67
Dec09 $0.60
Dec08 $1.86
Dec07 $1.57
Dec06 $1.08
Dec05 $1.10
Dec04 $0.25
Dec03 $0.10
Dec02 $0.91
Dec01 $0.51
Dec00 $6.42
Dec99 $5.58
Dec98 $3.32
Dec97 -$0.26
Dec96 $2.61
Dec95 $3.61

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.89
Dec14 $3.56
Dec13 $2.84
Dec12 $2.48
Dec11 $1.92
Dec10 $1.37
Dec09 $1.23
Dec08 $1.42
Dec07 $1.07
Dec06 $0.78
Dec05 $0.61
Dec04 $0.79
Dec03 $1.61
Dec02 $2.69
Dec01 $3.42
Dec00 $4.43
Dec99 $3.28

Other ModernGraham posts about the company

20 Companies in the Spotlight This Week – 8/16/14
Kansas City Southern Annual Valuation – 2014 $KSU

Other ModernGraham posts about related companies

CSX Corporation Annual Valuation – 2014 $CSX
Union Pacific Corporation Annual Valuation – 2014 $UNP
Norfolk Southern Corporation Annual Stock Valuation – 2014 $NSC
Kansas City Southern Annual Valuation – 2014 $KSU
Norfolk Southern Corp Quarterly Valuation – June 2014 $NSC


The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.