Challenges Hound Kansas City Southern: Time To Offload?

Shares of Kansas City Southern (NYSE:KSU) have underperformed the industry it belongs to in the last six months on multiple headwinds. The stock has gained 2.6% compared with the industry’s 4.8% rise.

The company has been plagued by high costs for quite some time. Continuing from the previous quarter, high operating expenses are likely to hurt the company's bottom line in the first quarter of 2018 as well. Last quarter, the metric increased 9%, mainly due to rise in fuel costs, which grew 20.5%.

Declining volumes at the Agriculture & Minerals unit might further hamper results in the first quarter. We remind investors that volumes at this sector contracted 9% in fourth-quarter 2017 on weaknesses in grain and food products.

The uncertainty over the North American Free Trade Agreement (NAFTA) negotiations is a major overhang on the stock. This is because the railroad operator draws a significant portion of its revenues from U.S.-Mexico shipments.

Kansas City Southern's trailing 12-month return on equity (ROE) undercuts its growth potential. Not only has the company’s ROE of 12.1% gradually decreased over the past year, it also compares unfavorably with the ROE of 20.4% for its industry and 16% for the S&P 500 Index.

The negativity revolving around the stock is evident from the Zacks Consensus Estimate for first-quarter earnings being revised 1.4% downward in the last 60 days.

The company’s Momentum Score of F further highlights its short-term unattractiveness.

The stock carries a Zacks Rank #4 (Sell). Going by the Zacks proven model, the Sell-rated stocks (4 or 5) are likely to underperform the broader market over the next one to three months.

In light of these downsides, it is advisable for investors to discard the stock from their portfolio for now.

Key Picks

Some better-ranked stocks in the broader Transportation sector are Atlas Air Worldwide Holdings (NASDAQ:AAWW) , International Consolidated Airlines Group (LON:ICAG) SA (OTC:ICAGY) and Cathay Pacific Airways Ltd. (OTC:CPCAY) . While Atlas Air Worldwide and International Consolidated Airlines sport a Zacks Rank #1 (Strong Buy), Cathay Pacific Airways carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Atlas Air Worldwide, International Consolidated Airlines and Cathay Pacific Airways have rallied more than 12%, 32% and 19%, respectively, in a year.

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