Kansas City Southern Valuation – February 2019 $KSU

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:

ModernGraham Valuation of KSU – February 2019

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 $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

EPSmg $6.51
MG Growth Estimate 9.58%
MG Value $180.07
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $94.40
MG Value based on 0% Growth $55.34
Market Implied Growth Rate 4.33%
Current Price $111.66
% 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
Graham Number $83.02
PEmg 17.15
Current Ratio 1.42
PB Ratio 2.21
Current Dividend $1.44
Dividend Yield 1.29%
Number of Consecutive Years of Dividend Growth 2

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $635,400,000
Total Current Liabilities $447,000,000
Long-Term Debt $2,679,300,000
Total Assets $9,469,800,000
Intangible Assets $0
Total Liabilities $4,337,100,000
Shares Outstanding (Diluted Average) 101,508,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.48
Dec2018 $6.13
Dec2017 $9.16
Dec2016 $4.43
Dec2015 $4.40
Dec2014 $4.55
Dec2013 $3.18
Dec2012 $3.43
Dec2011 $3.00
Dec2010 $1.67
Dec2009 $0.60
Dec2008 $1.86
Dec2007 $1.57
Dec2006 $1.08
Dec2005 $1.10
Dec2004 $0.25
Dec2003 $0.10
Dec2002 $0.91
Dec2001 $0.51
Dec2000 $6.42
Dec1999 $5.58

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $6.51
Dec2018 $6.26
Dec2017 $5.93
Dec2016 $4.21
Dec2015 $3.97
Dec2014 $3.56
Dec2013 $2.84
Dec2012 $2.48
Dec2011 $1.92
Dec2010 $1.37
Dec2009 $1.23
Dec2008 $1.42
Dec2007 $1.07
Dec2006 $0.78
Dec2005 $0.61
Dec2004 $0.79
Dec2003 $1.61

Recommended Reading:

Other ModernGraham posts about the company

Kansas City Southern Valuation – May 2018 $KSU
8 Best Stocks for Value Investors This Week – 12/27/16
Kansas City Southern Valuation – December 2016 $KSU
Kansas City Southern Analysis – August 2015 Update $KSU
20 Companies in the Spotlight This Week – 8/16/14

Other ModernGraham posts about related companies

CSX Corp Valuation – February 2019 $CSX
Union Pacific Corp Valuation – February 2019 $UNP
Canadian Pacific Railway Ltd Valuation – August 2018 $TSE-CP
Canadian National Railway Co Valuation – August 2018 $TSE:CNR
Kansas City Southern Valuation – May 2018 $KSU
Norfolk Southern Corp Valuation – April 2018-corrected
Norfolk Southern Corp Valuation – April 2018 $NSC
CSX Corporation Valuation – April 2018 $CSX
Union Pacific Corp Valuation – April 2018 $UNP
Canadian Pacific Railway Ltd Valuation – Initial Coverage $TSE:CP


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.

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