KSU – Market expectations are for improvements in Uniform ROA, but management may be concerned about profitability, their operating model, and Mexican operations

• Kansas City Southern (KSU:USA) currently trades above corporate averages relative to UAFRS-based (Uniform) earnings, with a 25.6x Uniform P/E. At these levels, the market has bullish expectations for the firm, but management may be concerned about their profitability, operating model, and Mexican operations
  
  

• Specifically, management may be concerned about continued declines in EPS and about the worsening investment climate in Mexico, and might lack confidence in their ability to improve velocity, dwell, and car miles per day. Additionally, they appear concerned about changes in the regulatory framework and their ability to sustain lower comp costs following the pandemic. Moreover, management may lack confidence in their ability to build out train length and maintain a flexible operating model. Management may also be downplaying the impact coronavirus has had on personnel, and exaggerating the potential of their operating initiatives. Furthermore, they may be concerned about automotive carloads continuing to decline, the sustainability of cross-border growth and their ability to stay disciplined with train consolidation. Finally, management may lack confidence in the sustainability of stable tonnage in Mexico and in their ability to accommodate larger trade needs