Friday, June 25, 2010

Analysts: Merger potential propels KCS stock

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The Gerson Lehman Group says Kansas City Southern, a relatively small Class I, “has enjoyed the PE ratio of a high growth company” seemingly because of its merger potential with the major carriers, “but it is hard to guess which one would like to own it. UP and BNSF already operate in its territory and gain little by acquiring the switching duties of serving its customers. Moreover, the Eastern carriers are not a very good match operationally and also have limited traffic to gain compared to a lot of switching expense.

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“Thanks to a solid recovery in the chemical sector and some impressive traffic gains in Mexico, KSC is on track to earning close se to its pre-recession numbers by as early as 2011; but the same can be said of the other railroads, which do not have any Mexican lines to bolster their earnings in 2010," said the management research company. "Like the other North American rail carriers, KSC has also improved its operating ratio during the last few years to the point, like them, that it will be able to earn pre-recession level profits with sub pre-recession traffic levels.

“KCS is a north-south railroad in a country where traffic flows are predominantly east-west. While it has a solid base of local customers, its traffic volume is tightly linked to the health of these companies and industries. With the exception of the jointly owned line that depends on Norfolk Southern traffic between Meridian, Miss., and Dallas, Texas, it has very limited prospects for growth in the intermodal sector.

“The highly touted Mexican connection to bring U.S. container traffic in through the West Coast port of Lazaro Cardenas is still a work in progress and KCS is unlikely to match the gains that the Canadian National Railroad has made with U.S. container traffic through the port of Prince Rupert, British Columbia.

“Most railroads are betting on intermodal traffic to carry them into the twenty-first century, and KCS is unfortunately positioned for this traffic.”