Kansas City Southern Could Be Good Way to Play Mexico

August 23, 2012 /

Like pocket-billiard wizards, some investors like to use the bank shot.
The indirect stock play will sometimes get you exposure earlier and safer than a direct play.

Consider a couple of facts recently reported in IBD. On Aug. 9, IBD reported that China lost its factory wage advantage to Mexico earlier this year. The article pointed out that companies are now “re-shoring” production to Mexico.

Then on Tuesday, the International Leaders column discussed the Next 11 fast-growth countries, which include Mexico.

Mexico’s GDP growth was 3.8% last year vs. 1.7% in the U.S., according to the CIA World Factbook.

You might say you don’t want to invest your money in Mexico. Certainly, there are drawbacks, such as red tape and cronyism.

However, here’s where the bank shot off the far rail comes in handy:Kansas City Southern ( KSU ).

The U.S.-based railroad provides a unique play on Mexico. Kansas City’s rail lines run from the Midwest and Southeast into Mexico.

In the second quarter, Mexico accounted for 46% of K.C.’s revenue, and the U.S. the rest.

Kansas City Southern’s customers span a wide range of industries, including electric utilities, chemicals, petroleum, agriculture, minerals, cars and consumer products.

Earnings grew 20% in Q2, and after-tax margin was 17%, the best in at least 18 quarters. Revenue, though, rose only 2% — the smallest gain in 10 quarters.

Weakness in the Mexican peso vs. the U.S. dollar was part of the problem. Utility coal carloads also were weaker than expected.

Yet the Mexico angle remains strong. Cross-border intermodal carloads increased on a year-ago basis by 56% in 2011, 78% in Q1 and 106% in Q2. CEO David Starling is bullish on the Mexico opportunity. He said at the July 17 earnings call that Mexico offers “the very beginning of what promises to be many years of expansion growth.”

Kansas City Southern’s annualized dividend yield is 1%.

The company suspended the payment of dividends in 2000, but restarted them in 2011.


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