Kansas City Southern (KSU) is a growth railroad stock, which is a rare thing at present. KSU is expected to issue its earnings report on Friday, before the market opens. If the earnings exceed or even meet expectations, expect a surge in stock price.
There are several factors working in Kansas City Southern’s favor which will be reflected in the earnings report. These include such areas as:
- a large growth in revenues expected to come from the cross-border intermodal network,
- a unique network in Mexico,
- good exposure to oil and gas shale regions, and no exposure to met coal, which has been witnessing a declining demand,
- plenty of hedge fund support,
- analyst backing,
- an attractive takeover target due to size, as well as
- plenty of technical support.
Technicals Setting-Up For Breakout
Shares of Kansas City Southern closed at $111.44 yesterday, down 1.14% — allowing the entry price for this call options to become more attractive and profitable. Kansas City Southern has a one year low of $72.80 and a one year high of $118.88.
The stock has a 50-day moving average of $109.28 and a 200-day moving average of $105.81. The company has a market cap of $12.110 billion and a P/E ratio of 40.17.
It is important to note that KSU has been trading in a sideways channel since June and is down $7.44 from its yearly high, which leaves an opportunity for a successful earnings report to send the stock to new highs.
Earnings Look Favorable
Kansas City Southern last announced its earnings results on Friday, July 19. The company reported $0.96 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.95 by $0.01. The company had revenue of $579.00 million for the quarter, compared to the consensus estimate of $579.30 million.
During the same quarter last year, the company posted $0.85 earnings per share. KSU’s revenue was up 6.2% compared to the same quarter last year. On average, analysts predict that KSU will post $4.11 earnings per share for the current fiscal year.
The latest earnings report has analyst expectations of a 7.8% hike in revenue to $622.3 million and a 35% surge in EPS to $1.11.
Because of its relatively small size, analysts had speculated earlier this year that Kansas City Southern would be an attractive takeover target causing shares to rise to a record high of $118.30 on July 19 before consolidating. This possibility is still a consideration.
Growth of KSU
There are now several new sources that will produce revenue for KSU — providing additional funds of $470 million through 2015 — this means a 23% boost compared to the 2012 base level. These areas that will generate extra revenue are:
- Cross-Border Intermodal Network — There is a potential market for cross-border intermodal which will mean an average of 2.6 million truckloads per year, a 58% rise from the current Southern states that KSU caters to.
- Automax Cars — There are 10 automotive assembly plants in Mexico, nine of which are being served by KSU which currently owns 40% of the total carloads being served. KSU has an order in for 140 Automax cars which is the largest railcar for hauling motor vehicles – this will mean lesser carrying costs.
Auto production is expected to rise by 41% in Mexico with the opening of several new automotive plants – Honda, Mazda, Nissan and Audi — boosting future carloads. Also, current plants are expected to extend their existing operational capacity.
- Steel Products: 70%-75% of Mexico’s steel production is transported through railcars and KSU is expecting 60% of this business to flow through their system.
- Crude Oil and Frac Sand Opportunities:
- A lack of a pipeline infrastructure for Bakken in North Dakota.
- KSU owns the land where it can benefit by connecting to nearby Gulf pipelines by building the Port Arthur Crude Terminal.
- Demand for crude oil from Canada, can be transported by KSU from Alberta oil sands, and
- the KSU network is well positioned to haul frac sand from the Midwest states through Kansas City down to shale regions such as Permian and Eagle Ford.
Analysts Anticipate Continued Upward Momentum
Most analysts have a positive opinion towards KSU, with analysts at:-
- Zacks reiterating a “neutral” rating and a $113.00 price target.
- Raymond James raising their price target on shares from $128.00 to $135.00.
- Barclays Capital raising their price target on shares of Kansas City Southern from $99.00 to $118.00 with an “equal weight” rating on the stock.
- Credit Suisse downgrading the stock from a “focus list” rating to an “outperform” rating.
Four equities research analysts have rated the stock with a sell rating, nine have issued a hold rating and two have given a buy rating to the company’s stock.
Hedge Funds Bullish on KSU
Many of the hedge funds are bullish on KSU, with a few key hedge fund managers who have upped their stakes significantly, such as Fisher Asset Management and Millennium Management. Other hedgies that are bullish include Adage Capital Management, Columbus Circle Investors and Renaissance Technologies.
The company’s strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, expanding profit margins, largely solid financial position with reasonable debt levels by most measures and solid stock price performance.
Also, it is anticipated that if the company beats or even comes in line with consensus, (and does not temper its outlook for future growth prospects); the stock could finally breakout of its sideways-moving trend.
Options Trade: Buy the KSU December 2013 115.000 call (KSU131221C00115000) at or under $3.00, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $4.50.
As of this writing, Ian Harvey did not hold a position in any of the aforementioned securities. Visit his site, stock-options-made-easy.com, for a wealth of information that will help you benefit from the exciting and lucrative world of options trading.