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Kansas City Southern (KSU)Stock (Railroads Industry, Transportation Industry)
 Kansas City Southern (NYSE: KSU) is a railroad shipping company that operates in the U.S. and Mexico. The company's principal subsidiary is wholly owned Kansas City Southern Railway Company (KCSR). In Mexico, KSU's Kansas City Southern de Mexico (KCSM) operates a primary commercial corridor of the Mexican railroad system and serves Mexican industrial cities and three of its largest shipping ports. KSU also owns 50% of the stock of the Panama Canal Railway Company (PCRC), providing ocean-to-ocean freight and passenger service along the Panama Canal.[1] The largest commodities transported by KSU in 2007 were forest products (such as timber) and metals (29% of revenue), minerals and agricultural goods like corn and other grains (23%), chemicals and petroleum (18%), and coal (11%).[2] KSU grew in 2007 - its revenues grew by 5%, and its net income increased by 41%. However, the firm does face challenges. First of all, like many transportation companies, it faces the threat of record high oil prices. Secondly, KSU faces increased competition from trucks which are newly being granted access to cross the border onto U.S. highways, thus decreasing the need to use trains to send goods across the border. Finally, KSU has been named as a defendant in an antitrust lawsuit - this will be costly, with legal fees and possible fines digging into KSU's net income. [edit] Business Overview
[edit] Breakdown by Segment The main commodities transported by KSU are:[10]
[edit] Breakdown by Geography KSU's countries of operation are the U.S. (Kansas City Southern Railroad/KCSR) and Mexico (Kansas City Southern de Mexico/KCSM). KCSR and KCSM are interconnected, forming one cross-border network of railroads that uses 6,000 miles of track. On its northern end, the network runs through 10 states in the Midwest and Southeast regions of the United States. At the southern end, the KSU rail network covers principal Mexican industrial centers and seaports.[12] The map at the right shows KSU's rail network. In 2007, revenues were split fairly evenly between U.S. and Mexican operations - revenues were $929.6M (53%) in the U.S., compared to $813.2M (47%) in Mexico.[13] [edit] Key Trends and Forces[edit] The rise in fuel prices increases KSU's costs.The increase in oil prices from an average of $72/barrel in 2007 to a record high of $145 in July 2008,[14] raises costs for KSU's rail shipping: fuel costs were $15 million higher in Q1 2008 than in Q1 2007, a 24.6% increase. [15] KSU (and other railroads) have methods of compensating for rising fuel costs. The first is fuel hedging, wherein transportation firms buy futures contracts that allow them to purchase fuel in the future at a predetermined price. The other main way that firms offset rising fuel costs is by passing them on to customers through fuel surcharges. Fuel costs for 2007 came to $270.8 million (20% of total operating expenses), but fuel surcharges compensated for 49% of that by adding $133.2 million to the company's revenue.[16] Fuel surcharges, however, make rail shipping more expensive for customers, who supply all of KSU's business. [edit] The demand for ethanol raises demand for grains, which are one of KSU's biggest sources of revenue.Due to high oil prices and concerns about the environment and foreign dependence for oil, demand for biofuels like ethanol has increased rapidly; after increasing by only 700 million barrels per year between 1990 and 2000, U.S. production of ethanol hit 6.4 billion gallons in 2007 and is projected to reach 12.5 billion gallons by 2009.[17] Grains such as corn are commonly used as the main ingredient in ethanol production. In 2007, grains shipments accounted for approximately 13% of KSU's total revenues.[18] As ethanol production grows in the U.S., producers need more grains and other raw materials, which KSU transports. [edit] A ruling that lets Mexican trucks operate in the U.S. will hurt KSU's truck-to-train operations.Truck-to-train intermodal shipping, in which Mexican trucks transfer their goods to KSU trains for transport into the United States, is an important revenue source for KSU, accounting for 8% of 2007 revenue.[19] The North American Free Trade Agreement (NAFTA) originally called for Mexican trucks to have unrestricted access to U.S. highways, but this didn't happen until 2007, when the U.S. Supreme Court overturned a lesser court's ruling blocking access to Mexican trucks. As part of a pilot program introduced that same year, 500 trucks from 100 Mexican firms were given permission to operate freely on U.S. highways. As of July 2008, however, the program had not actually commenced due to repeated objections by the U.S. Congress based on concerns about highway safety and the potential loss of U.S. jobs.[20] [edit] KSU was named as a defendant in a fuel surcharge-fixing lawsuit.In March 2008, Archer-Daniels-Midland Company (ADM) filed an antitrust lawsuit against five U.S. railroad companies, including KSU. The suit alleges that Burlington Northern Santa Fe (BNI), CSX (CSX), Norfolk Southern (NSC), Union Pacific (UNP) and KSU cooperated in fixing their prices for fuel surcharges.[21] Fuel surcharges are important to offsetting KSU's operating expenses; they compensated for 49% of the company's total fuel costs in 2007.[22] As of July 2008, there was no news on the progress of the suit. [edit] CompetitionKansas City Southern is one of the seven Class 1 (revenue over $346.8M[23]) railroads in the United States. However, KSU's most direct competitors in the geographical markets that it serves are Burlington Northern Santa Fe (BNI) and Union Pacific (UNP) in the U.S. and Ferromex, a private rail company with the largest (by mileage) railroad in Mexico.[24]
KSU is significantly smaller than either of its American competitors in terms of revenue and net income, but it operates in a specific market niche, i.e. the rail link between the U.S. and Mexico. [edit] Market ShareThe Association of American Railroad reported that the total 2006 freight revenue in the U.S. rail industry was $54 billion (as of 7/28/08, 2007 figures were not yet available).[30] The following market share figures are based on this number.
 Kansas City Southern2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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