Why Kansas City Southern shares soared 15.1% in July
Railroad shares Kansas City South (KSU) rose 15.1% in July according to data provided by S&P Global Market Intelligence. This decision was inspired by a few related factors. First, the company reported a strong run of second-quarter earnings mid-month. Second, the media claims that private equity firms are interested in bidding for the railroad.
Second quarter earnings, and the positive trend they contain, were previously discussed in an article. To briefly summarize:
- The company continues to make progress in improving operational efficiency and reducing costs through its precision programmed railway (PSR) – something that should improve profitability in the coming years.
- Carload volumes are improving from the May low.
- Trade with Mexico is improving – the railroad connects industrial cities in Mexico to major US centers – and there is an opportunity for long-term growth through the ability of manufacturers to relocate from China to the US and Mexico.
Meanwhile, the takeover speculation is understandable given that Kansas City Southern is by far the smallest of the Class 1 railroads listed. Moreover, it is an attractive strategic asset due to its role in the trade link between the United States and Mexico.
Buyout speculation comes and goes and that’s not a specific reason to buy the transportation equipment. However, the reasons Why the railway could be sought is certainly. Like all others listed Class 1 railways, Kansas City Southern is making great strides in improving key metrics such as increasing train lengths, reducing terminal wait times and increasing car speeds. These improvements will help the railroad reduce its operating expenses and therefore its operating margin in the future.
As such, the market is rational in pushing the stock price higher as management makes more and more progress on the issue. Additionally, if it becomes clear that the companies are making concrete plans to shift production to North America and Mexico, then the market should start pricing in increased revenue expectations for the title.
The trading environment remains challenging and there is no guarantee that the recovery will continue as it started over the summer. However, while investors wait to see what happens with the broader economy, they can keep an eye on the company’s PSR metrics. In addition, management’s comments regarding the long-term potential for margin expansion should be carefully monitored. There’s a lot to like about the railroad, even if 2020 is shaping up to be a very tough year.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.