Company Profile (excerpt from Reuters): Kansas City Southern (KCS), incorporated on January 29, 1962, is a holding company. The Company has 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. Its subsidiaries include The Kansas City Southern Railway Company (KCSR), Kansas City Southern de Mexico, S.A. de C.V. (KCSM), Mexrail, Inc. (Mexrail), KCSM Servicios, S.A. de C.V. (KCSM Servicios), Meridian Speedway, LLC (MSLLC) and Panama Canal Railway Company (PCRC). KCSR serves a 10-state region in the midwest and southeast regions of the United States and has the north/south rail route between Kansas City, Missouri and various ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas. KCSM operates a commercial corridor of the Mexican railroad system. KCSM’s rail lines provide rail access to the United States and Mexico border crossing at Nuevo Laredo, Tamaulipas, the rail freight interchange point between the United States and Mexico. As of December 31, 2016, KCSM served its Mexico’s industrial cities and three of its seaports. KCSM also provides rail access to the Port of Lazaro Cardenas on the Pacific Ocean.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$11,271,128,259||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.42||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||168.77%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||17.15||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.21||Pass|
|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||1.42||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||14.22||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
|MG Growth Estimate||9.58%|
|MG Value based on 3% Growth||$94.40|
|MG Value based on 0% Growth||$55.34|
|Market Implied Growth Rate||4.33%|
|% of Intrinsic Value||62.01%|
Kansas City Southern does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $3.97 in 2015 to an estimated $6.51 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.33% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Kansas City Southern revealed the company was trading above its Graham Number of $83.02. The company pays a dividend of $1.44 per share, for a yield of 1.3% Its PEmg (price over earnings per share – ModernGraham) was 17.15, which was below the industry average of 19.16, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-36.47.
Kansas City Southern receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$36.47|
|Number of Consecutive Years of Dividend Growth||2|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2018|
|Total Current Assets||$635,400,000|
|Total Current Liabilities||$447,000,000|
|Shares Outstanding (Diluted Average)||101,508,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$6.48|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$6.51|
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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. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.