Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Kansas City Southern stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Kansas City Southern has a trailing twelve months PE ratio of 18.74, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.48. If we focus on the long-term PE trend, Kansas City Southern’s current PE level puts it below its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the Zacks classified Transportation - Rail industry’s trailing twelve months PE ratio, which stands at 20.84. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Kansas City Southern has a forward PE ratio (price relative to this year’s earnings) of just 16.61, so it is fair to say that a slightly more value-oriented path may be ahead for Kansas City Southern stock in the near term too.
P/CF Ratio
An often-overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Kansas City Southern’s P/CF ratio of 11.50 is lower than the Zacks classified Transportation - Rail industry average of 15.36, which indicates that the stock is somewhat undervalued in this respect.
Broad Value Outlook
In aggregate, Kansas City Southern currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Kansas City Southern a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Kansas City Southern is just 1.31, a level that is far lower than the industry average of 1.65. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, KSU is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Kansas City Southern might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘A’. This gives KSU a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen two estimates go higher in the past sixty days compared to one lower revision, while the full year estimate has seen one upward revision and six downward revisions in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has declined by 0.9% in the past two months, while the full year estimate has also inched lower by 1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Kansas City Southern Price and Consensus
Kansas City Southern Price and Consensus | Kansas City Southern Quote
This mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Bottom Line
Kansas City Southern is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 14%) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Transportation - Rail industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
Zacks' 2017 IPO Watch List
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Image: Bigstock
Does Kansas City Southern Offer a Good Value Buying Opportunity?
Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Kansas City Southern stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Kansas City Southern has a trailing twelve months PE ratio of 18.74, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.48. If we focus on the long-term PE trend, Kansas City Southern’s current PE level puts it below its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the Zacks classified Transportation - Rail industry’s trailing twelve months PE ratio, which stands at 20.84. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Kansas City Southern has a forward PE ratio (price relative to this year’s earnings) of just 16.61, so it is fair to say that a slightly more value-oriented path may be ahead for Kansas City Southern stock in the near term too.
P/CF Ratio
An often-overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Kansas City Southern’s P/CF ratio of 11.50 is lower than the Zacks classified Transportation - Rail industry average of 15.36, which indicates that the stock is somewhat undervalued in this respect.
Broad Value Outlook
In aggregate, Kansas City Southern currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Kansas City Southern a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Kansas City Southern is just 1.31, a level that is far lower than the industry average of 1.65. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, KSU is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Kansas City Southern might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘A’. This gives KSU a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen two estimates go higher in the past sixty days compared to one lower revision, while the full year estimate has seen one upward revision and six downward revisions in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has declined by 0.9% in the past two months, while the full year estimate has also inched lower by 1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Kansas City Southern Price and Consensus
Kansas City Southern Price and Consensus | Kansas City Southern Quote
This mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Bottom Line
Kansas City Southern is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 14%) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Transportation - Rail industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
Zacks' 2017 IPO Watch List
Before looking into the stocks mentioned above, you may want to get a head start on potential tech IPOs that are popping up on Zacks' radar. Imagine being in the first wave of investors to jump on a company with almost unlimited growth potential? This Special Report gives you the current scoop on 5 that may go public at any time.
One has driven from 0 to a $68 billion valuation in 8 years. Four others are a little less obvious but already show jaw-dropping growth. Download this IPO Watch List today for free >>