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Kansas City’s Strong Network Impresses; Coal Woes Remain


On Nov 28, we issued an updated research report on Kansas City Southern KSU.

The company posted mixed results in the third quarter as earnings missed estimates but revenues surpassed expectations. The company, however, witnessed a year-over-year decline in both metrics.

Coal-related headwinds continue to adversely impact the company. The energy segment saw a significant drop in revenues. Chances of coal volumes returning to its prior levels appear dim. The company’s performance has been impacted by floods, outages and service disruption in the Mexico unit. However, we are impressed by growth in segments like Chemical & Petroleum and Agriculture & Minerals.

Key Challenges

The surprise victory of Donald Trump in the U.S. Presidential elections is likely to be unfavorable for the company. This is because the current President-elect does not have positive opinions about Mexico. Given that Kansas City has a sizeable chunk of operations in Mexico, it is to be seen how the company’s business is impacted going forward. Meanwhile, we wait to see how the political relations of the countries pan out once Trump takes office in Jan 2017. Nonetheless, we expect the company to overcome these challenges on the back of its vast networks. We are also positive on the possibility of increasing demand in the coming quarters as economic growth in the U.S. starts showing signs of recovery. Although, risks related to adverse foreign exchange movements remain, we are bullish on the company's efforts to reward shareholders.

Kansas City also faces tough competition from peers such as Union Pacific Corp. UNP, CSX Corp. CSX and Norfolk Southern Corp. NSC.

Zacks Rank

Kansas City currentlycarries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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