KSU – Market expectations are for record-high Uniform ROA, but management has concerns about revenue, business opportunities, and Mexican operations

May 22, 2019

  • Kansas City Southern (KSU:USA) currently trades near recent averages relative to UAFRS-based (Uniform) Earnings, with a 21.6x Uniform P/E. At these levels, the market has bullish expectations for the firm, but management has concerns about revenue growth, their ability to seize business opportunities, and the business environment in Mexico
  • Specifically, management may lack confidence in their ability to sustain improvements in their operating ratio, cost reduction, and revenue growth. Furthermore, they may be concerned about yard congestion, the execution of the PSR program, and their ability to seize business opportunities. Moreover, they may be exaggerating the demand in train freight, the progress of southbound train consolidation, and their ability to improve Mexican infrastructure. Additionally, they may be downplaying concerns about heavy customer switching in Mexico, and may lack confidence in the sustainability of pricing increases, their ability to manage EPS declines, and their ability to achieve customer and shareholder expectations.

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