Why Kansas City Southern (KSU) Is Dropping

NEW YORK (TheStreet) -- Shares of Kansas City Southern (KSU) are dropping on Tuesday on fears reform regulation in Mexico will hurt profitability.

By late morning, shares had plunged 5.4% to $90.79. Trading volume of 3 million was nearly double its three-month daily average.

Earlier, Mexico's lower house of Congress approved legislation which would reform the nation's rail freight industry, a sector dominated by the duopoly of Grupo Mexico and Kansas City Southern. The bill, which still needs Senate approval, would hope to encourage increased investment in infrastructure and lower freight prices.

According to Reuters, Grupo Mexico and Kansas City Southern are considering legal action, arguing the bill infringes upon the 14 years of exclusivity they still have in their concessions.

The concerns were large enough for analysts at JPMorgan to downgrade the stock.

"We are lowering our rating on KSU from Overweight to Neutral due entirely to our concern that there is a meaningful probability that new rail legislation in Mexico could become law. While such a law would be challenged by KSU and other railroads, it ultimately could translate to less pricing opportunity in Mexico," wrote analyst Thomas Wadewitz in the report.

"The near-term impact to KSU stock would likely come in the form of lower valuation as visibility to the EPS impact might be unclear for several years. While we still believe that KSU has an attractive multi-year volume growth story, from a risk management perspective we can no longer justify recommending the stock in light of the risk from potential new rail legislation in Mexico."

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