It goes without saying that I favor the railroad sector. And why not? The nation's inadequate, congested interstate highway system and vehicle transportation system dependent on oil suggests a bottle-neck plagued, high-cost road transportation network in the years ahead. That opens the door for a resurgence of the rails, and Kansas City Southern (NYSE: KSU) is part of that fortunate circle. Kansas City Southern has operations in the U.S. (56% of FY2008 revenue) and Mexico (44% of FY2008 revenue), including 6,000 miles of track.
KSU's network efficiency and cost controls should propel earnings growth of better than 10% per year for at least the next three years, and probably longer. True, contract renewals in the year ahead may not be able to sustain price increases, but look for lower fuel costs to offset the above. The First Call FY2009/FY2010 EPS estimates for KSU are 59 cents to $1.05.
Further, if manufacturing plants along KSU's lines idled due to the recession returning to production sooner than expected, that will provide an additional support for shares. A delayed U.S. economic recovery negates the above, but the risk/reward needle remains tipped in favor of a Buy.
Stock Analysis: Kansas City Southern is a moderate-risk stock. Consider buying a 50% position in KSU now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your KSU position before October 2009. Sell/Stop Loss if you were to buy shares in this company: $8.50.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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