Monday, 23 March 2015

Kansas City Southern and the law of round numbers

The last (and as it happens first) time I bought the stock of Kansas City Southern was following the last profit warning in early 2014 and the share fell into the US$90s. I traded it out for a solid double digit profit but looking at the chart below it could have been even better.  


Anyhow from today's perspective it is good that I don't own the stock as for the second year in a row the company has issued a Q1 warning this time noting it 'now expects low single-digit revenue growth, reduced from the mid single-digit revenue growth provided in the previous full-year 2015 guidance issued in January 2015'.  

Well that's not great.  And the reasons for this?  Back to the statement from the company: 

'...reduced revenue guidance reflects slower year-to-date carload growth primarily from the energy sector, along with a continued deterioration in the value of the Mexican peso against the U.S. dollar and lower fuel surcharge revenues driven by lower WTI prices'  

To be fair to Kansas City Southern they did indicate some of these factors in January's Q4/FY results presentation as shown in the graphic below...


...the reality is that all these issues have just got worse and hence once again the share is within 5-6% odd of the US$100 mark.  

Kansas City Southern is a share to keep an eye on.  As the company's own corporate profile write-up noted:

'Kansas City Southern's North American rail holdings and strategic alliances are primary components of a NAFTA Railway system, linking the commercial and industrial centers of the U.S., Mexico and Canada'

Despite the Mexican stock market recently being stuck in a narrow range as this excellent chart from Robert Main shows...
(h/t @RobertMain53)

...the strategic trend/opportunity from enhanced US-Mexico trade makes Kansas City Southern's operations/infrastructure of medium-term interest hence my trade of the stock last year.  

As with all more strategic oriented plays even with a lower share price than the end of last week the share is not cheap - around a forward x16 EV/ebit ratio - but of course that is with a semi-depressed shorter-term earnings profile.  In essence the call would be to watch out for another sub US$100 share price move.  That's the first point I will be buying.  

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