Booming Mexico-U.S. Trade Buoys Kansas City Southern: Freight

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Kansas City Southern railcars are rumbling over the Rio Grande as record trade between Mexico and the U.S. buffers the railroad from a slowing global economy. Escalating shipping and labor costs in world manufacturing centers such as Asia have encouraged companies including Nissan Motor Co. and DuPont Co. to shift capital spending to Mexico. Many of the goods produced by their investments will head to the U.S., the destination for about 80 percent of Mexico’s exports.

Cross-border merchandise trade totaled $341 billion by the end of September, about 18 percent higher than it was at the same point in 2010, according to the most recent data from the Bureau of Transportation Statistics in Washington. The increase will help Kansas City Southern, the only U.S. railroad with a wholly owned Mexican subsidiary, weather the effects of a possible European recession as the 125-year-old company seeks to take business away from trucks traversing the border.

“This is the best organic growth story in the U.S. rail network,” said Matt Troy, an analyst at Susquehanna Financial Group in New York. He estimates Kansas City Southern revenue will rise two to three times faster than similar regional railroads for “several years.” “The combination of bringing manufacturing capacity back from Asia and the potential for highway share conversion creates a very strong one-two punch.”

Gunfighter Generation

Traffic at the company founded in 1887, the same year American gunfighter Doc Holliday died, increased 9.2 percent in 2011 through mid-December, Troy said, citing data from the Association of American Railroads. That’s about two to three times the growth at other North American railroads, he said, adding that car loadings at Kansas City Southern have exceeded their pre-recession peak in 2006, unlike the rest of the industry.

Risks for Kansas City Southern include a possible recession in the U.S. or new federal regulations. A reduction in volume on its rails due to any prolonged weakness in the economy would leave the company vulnerable because a unionized workforce makes cost-cutting difficult, Troy said.

Also, “there’s increasing sensitivity toward pricing power,” Troy said. “The risk would be if Washington were to take a more proactive role in examining how rails price their business.” Drug-related violence in Mexico hasn’t affected Kansas City Southern’s operations, Chief Financial Officer Michael Upchurch said at a Sept. 13 conference in Chicago.

The company’s shares have gained 18 percent since June 30, while the Standard & Poor’s Railroads Index has fallen 1.6 percent in the same period. Troy, who has a “positive” rating on Kansas City Southern, said “you can check the box for every type of investor.”

Source: Source: Business Week


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