Jump on the Kansas City Southern Bandwagon: Super Growth Ahead

Apr. 5.07 | About: Kansas City (KSU)

Kansas City Southern (NYSE:KSU) rides the rails from Missouri to Mexico. The company's Kansas City Southern Railway [KCSR] owns and operates about 3,100 miles of track in the midwestern and southern U.S. KCS offers rail freight service in Mexico through Kansas City Southern de Mexico (KCSM, formerly TFM), which maintains more than 2,600 miles of track and serves three major ports. Another KCS unit, Texas Mexican Railway, connects the KCSR and KCSM systems. The KCS railroads transport such freight as forest products and metals, chemical and petroleum products, and agricultural and mineral products.

Think tech stocks have high growth? Here's a railroad that analysts are forecasting will show 35% increases in earnings, on average, every year for the next 5 years. They're looking for revenues to grow by 14%, on average, in the same time period. EPS was 39 cents in 2004, then 41 cents in 2005. They jumped to $1.08 in 2006, expected to be $1.40 this year and $1.80 next year. Revenues went from $639 million in 2004 to $1.659 billion last year. Look for $1.8 billion this year and $1.95 billion next year.

Revenues are coming mostly from agricultural products, minerals, and paper/forest products with every indication that they will remain strong. The company recently renewed long term contracts with several paper customers. These contracts have fuel surcharge clauses, covering any increase in diesel fuel costs for KSU. Also, prices have been firming and holding for the carrier. An expanded service that is doing well is the shuttle between Kansas City and several Mexican towns. A shuttle has faster speed and turnaround times than the normal service. At the beginning of 2006, there were 2 shuttles. Now there are 12.

Some newer contracts include one with GM (NYSE:GM) in Mexico where KSU is doing vehicle and transmission distribution. Another: delivering windmills for power generation as well as a new contract for bio-diesel.

Long term prospects look good here. Traffic between U.S. and Mexico will most likely only increase as manufacturers use lower cost labor south of the border. In Mexico, KSU serves several of the ports which have global goods coming and going. One other international bonus: KSU owns 50% of the Panama Canal Railway which has ocean to ocean service and is a good alternative to shipping through the ever more congested Panama Canal.

The stock has benefited from all this good news, going from $12.60 in 2004 to its current all time high of $33.60 as of this writing. Investors like this story and have bid up the stock accordingly. The P/E ratio of 47 is comparatively reasonable when looking at past years when it traded as much as 50 times earnings (2005) or 72 times earnings (2003). Other numbers to consider: current assets are about 70% of current liabilities. Return on Equity has been improving: 6% in 2006, expected to be 8% this year and 9% in 2008. The Net profit margin is also improving. In 2005 it was 2%. In 2006, 6.3%. This year look for 7.6% and next year 8.9%.

Check out KSU if you're looking for an international stock or a railroad stock. It has much more to the story that may or may not make it enticing. Just remember it's already trading at a P/E much higher than most stocks with earnings.

  • The Good: Great earnings growth expected.
  • The Bad: The stock has tripled in 3 years.
  • The Ugly: It's trading at a very high P/E.
  • KSU 1-yr chart

    Disclosure: none