Monday, December 30, 2013

Investing in Railroad Earnings Growth

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As the economy has come back, many cyclical sectors have seen impressive strength. This is especially true in the transportation industry, as surging demand has greatly helped this key market sector.

While many investors have likely keyed in on companies like Union Pacific (UNP) or CSX (CSX) to play this trend, some smaller rail firms might also be interesting plays. One such company is Kansas City Southern (KSU), a $13 billion railroad operator that has a focus on the Midwest and South.

KSU in Focus

Beyond its focus on the middle part of the U.S., KSU also has a heavy presence in the Mexican market. In fact, the company has a rail passageway between Mexico City and Laredo, Texas, serving several Mexican industrial cities, as well as a few of Mexico’s important seaports as well. And given how dependent Mexico is on America for trade, the resurgence in the U.S. market has been great news for both Mexican industrial production, and KSU as a shipper of these products.

Add in reports that Mexico is beginning to beat out China in terms of productivity-adjusted wages, and it becomes pretty obvious that industrial production in Mexico is going to continue to grow. Given this, it seems pretty likely that companies with the ability to get these finished goods to other markets, such as Kansas City Southern, will benefit immensely.

Thanks to this trend in KSU’s key market, and the broad positive environment for railroad operators heading into the coming year, it shouldn’t be too surprising that many analysts have been raising their estimates for Kansas City Southern’s earnings. Earnings have modestly increased for both the current quarter and the current year period, but the real story for KSU is the growth.

The company looks to deliver nearly 25.9% earnings growth (yoy) for the current quarter, and EPS growth of over 22% for the current year. Meanwhile, for the next year time frame, EPS growth is expected to come in just below 25%, suggesting that if anything, earnings growth is accelerating for this often-overlooked railroad operator.

And, as we alluded to earlier, KSU has some great company in the railroad space, as the Zacks Industry Rank for the segment is in the top 10% of all industries studied. In fact, no company in the space receives a Zacks Rank below #3 (Hold), meaning that there aren’t any bad picks in this strong segment.

Bottom Line

With that being said, KSU stands apart, as it is the only firm, at time of writing, in the railroad space that has a Zacks Rank #1 (Strong Buy). Plus, its Rank was #2 a week ago, suggesting it is surging up the charts, and is an interesting choice for investors seeking some rail exposure right now.

The company also has a bit of a competitive advantage in the crowded rail market, thanks to its solid position in the Mexican industrial space. This allows KSU to benefit from the surge in Mexican production, and to not be as concerned by American Heartland issues relating to commodities as many of its peers.

So if you are looking for a great choice in the railroad market heading into 2014, consider Kansas City Southern. You have probably overlooked this one in favor of some of its larger counterparts, but it could be well positioned to benefit from some of the strong trends in the market, and it is currently the only Zacks Rank #1 Stock in the space, meaning that good days may still be head for this overlooked rail operator.

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