A Railroad Revival?

MARK THOMAS
CHIEF INVESTMENT STRATEGIST
VALUE STOCK TIPS

COMPANY: Kansas City Southern
TICKER: KSU (NYSE)
PRICE: $26.25
52 WEEK RANGE: $19.47-$28.42
MARKET CAPITALIZATION: $1.98 billion

Mark Thomas is the chief investment strategist at Value Stock Tips (www.valuestocktips.com), an e-mail newsletter alert service that delivers stock tips to subscribers daily. Kansas City Southern is a domestic and international railroad company based in Kansas City, MO. Mr. Thomas spoke to Katharine Herrup of The New York Sun about why KSU's merger with a Mexican railroad will provide it with some more fuel for its stock.

Why do you like the stock?

I've been following the railroad sector for a few years. Most railroad companies are liked by fund managers now, but KSU is more of a mid-cap company that is not as well known now. I look for a stock in the sector that is undervalued, but has some kind of catalyst in a certain amount of time that will make it equal to the other companies in the sector. Burlington Northern and Norfolk Southern are two leading railroads in the sector, but KSU trades at a 15% discount to the valuation of its peers.

Kansas City Southern also did a merger with a Mexican railroad company, Grupo TFM, that they had a joint venture with previously, and they now own the company. KSU is mostly in the Midwest, but these shippers in Asia are tired of these shipping ports in Los Angeles and Long Beach, Calif., and now it's cheaper to ship to the Mexican ports and then ship by rail to the Midwest.

Overall, when I look at companies in a certain sector, the first thing I look at is the company's enterprise value, which is the market cap plus debt minus cash, and then I divide all of that by one year's revenue. This equation shows me the total value of the company. It also shows me how expensive this company is versus other companies in the sector. So I am looking at this like another company would be if they were buying it.

Why do you like the railroad industry?

1976-1980 was when railroad companies had their last big boom time because they had a gasoline advantage over trucking. The railroad industry has strong pricing powers right now because they have such a large cost advantage over trucking. Railroads also will impose a fuel surcharge to make up for the extra gasoline cost so they have an advantage of being able to pass on their higher fuel costs. The thing with railroads is that they have merged so many times the companies left basically own their own region. KSU is also different because it runs north-south whereas most railroads run mainly east-west.

What's driving KSU's growth forward?

Their operating efficiencies will grow which will produce more earnings. Their new intermodal service - a combination of trucking and rail that is available in Mexico too - will help. They have to put up some good numbers to tell Wall Street that their valuation number is too low.

Is it a good time to buy?

I personally own it. I'd buy if the stock is under $26.50.