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."

TheStreet Ratings team rates KANSAS CITY SOUTHERN as a Buy with a ratings score of B+. The team has this to say about their recommendation:

"We rate KANSAS CITY SOUTHERN (KSU) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, good cash flow from operations, expanding profit margins and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • KSU's revenue growth has slightly outpaced the industry average of 4.9%. Since the same quarter one year prior, revenues slightly increased by 8.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Road & Rail industry average. The net income increased by 24.0% when compared to the same quarter one year prior, going from $91.80 million to $113.80 million.
  • Net operating cash flow has increased to $225.80 million or 43.63% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 10.26%.
  • 41.33% is the gross profit margin for KANSAS CITY SOUTHERN which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 18.48% trails the industry average.
  • KANSAS CITY SOUTHERN has improved earnings per share by 24.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, KANSAS CITY SOUTHERN reported lower earnings of $3.18 versus $3.42 in the prior year. This year, the market expects an improvement in earnings ($4.60 versus $3.18).

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