We reiterate our Neutral recommendation on Kansas CitySouthern (KSU), indicating that the stock will perform almost in line with the broader market. The company reported solid first-quarter 2011 results, which meets the Zacks Consensus Estimates. Kansas City Southern posted a record improvement in the operating ratio for the quarter mainly attributable to improvement in business volumes, effective cost control measures, and strong pricing environment.
An improving U.S. economy, massive surge in automotive and intermodal shipments coupled with a sharp rebound in many of the company’s end markets will fuel future growth of Kansas City Southern. Mexico has become the major growth driver due to low cost labor. Meanwhile, the stock price has moved up by more than 76% in the last year. We believe the current valuation is fairly reflecting all the positives, leaving little room for above market gain.
During the first quarter of 2011, Kansas City Southern achieved several operating milestones. Quarterly operating ratio was 73.8% compared with 75.2% in the prior-year quarter. This was the best ever first-quarter operating ratio in the company’s history. Total business volume in the reported quarter was 474,100, up 7% year over year. Operating income in the same quarter was $127.8 million, up 18.1% year over year.
Kansas CitySouthern competes with other class one freight railroads such as Union Pacific Corp. (UNP) and CSX Corp. (CSX). Despite a moderate economic environment, management is still committed to the same goals of $3 billion in revenue and an operating ratio in the low 70s. Cross-border traffic between the U.S. and Mexico is expected to improve in the long run. Rising business volume and price will further consolidate the company’s top line in the future reporting quarters.
CSX CORP (CSX): Free Stock Analysis Report
KANSAS CITY SOU (KSU): Free Stock Analysis Report
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