Kansas City Southern Aided By Cost Cuts Amid Low Volumes

We recently issued an updated report on Kansas City Southern (NYSE:KSU) . Factors like reduced rail freight traffic and change in Mexico fuel excise tax credit hurt the company’s financials. However, adoption of the precision scheduled railroading model and its shareholder-friendly approach are aiding growth.

Kansas City Southern's adoption of the precision scheduled railroading model is aimed at improving operational efficiencies and reducing network congestion. Improvement in adjusted operating ratio (operating expenses as a percentage of revenues) is an added positive. This can be attributed to the company's efforts to cut costs. Lower the value of this key metric, the better. Kansas City Southern expects 2020 operating ratio in the 60-61% range.

Trump's decision to indefinitely suspend 5% tariff on all goods imported from Mexico bodes well for Kansas City Southern, since the company generates a significant amount of revenues from the country.

The company's efforts to reward its shareholders through dividend payments and buybacks are impressive. It raised quarterly dividend payout on its common stock by 11.1% to 40 cents a share ($1.60 annually).

Kansas City Southern Price

Kansas City Southern price | Kansas City Southern Quote

However, Kansas City Southern is being hurt by reduced rail freight traffic. Overall volume declined 1% in 2019. Softness pertaining to intermodal volume (down 5% in 2019), automotive volume (down 4%) and weaknesses in the crude oil (down 20% in 2019) are resulting in low rail traffic volume.

Also, change in Mexico fuel excise tax credit has resulted in increased cost of fuel for the company in Mexico. Notably, the loss of the Mexican Fuel Excise Tax Credit hurt fourth-quarter adjusted operating ratio to the tune of roughly 90 basis points.

Owing to the coronavirus outbreak, shipments might get hurt, which is likely to be reflected in its first-quarter 2020 results.

Zacks Rank & Stocks to consider

Kansas City Southern currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Transportation sector are GATX Corporation (NYSE:GATX) , Höegh LNG Partners LP (NYSE:HMLP) and Teekay Tankers Ltd. (NYSE:TNK) . GATX and Teekay Tankers sport a Zacks Rank # 1 (Strong Buy), whereas Höegh LNG carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings per share (three to five years) growth rate for GATX, HöeghLNG and Teekay Tankers is pegged at 15%, 8.5% and 3%, respectively.

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