Kansas City Southern ( KSU - Analyst Report ) reported excellent financial results in the second quarter of 2011. In the last quarter, the company improved year over year on several metrics including operating ratio, business growth, pricing gain, and cost control. Solid commodities volume, healthy demand for coal, and improved rail efficiency helped Kansas City Southern to perform fabulously.

Railroads are gaining momentum over the trucking industry due to significant rise in fuel costs of truckers. The railroads are at present carrying more cargos, which is helping them to prosper even under a volatile U.S. economy. Mexico has become the major growth driver due to low labor costs. On the other side, we believe if the recent U.S. economic volatility persists for a long time, Kansas City Southern will be significantly affected. Meanwhile, the stock price has moved up by nearly 45% last year. We therefore reaffirm our long-term Neutral recommendation.

Cross-border traffic between the U.S. and Mexico is expected to improve in the long run. Rising business volume and price will further consolidate the company’s top line in the future reporting quarters. Mexico has become a huge growth engine for the company. Kansas City Southern is planning to increase its capacity to support the growing Mexican market. Furthermore, labor cost in Mexico is much cheaper than the U.S., which will also boost the company’s bottom line.

The current state of volatile economy in the U.S. and abroad may keep Kansas City Southern’s top-line growth under pressure in the near future, with most sectors unable to fully recover from the global economic recession. Although business volume increased in the last year, this is still below the pre-recession 2008 level. For the week ending August 6, 2011, the Association of American Railroads reported that carloads moved by the U.S. railroads fell 1.2% year over year. Kansas City Southern competes with other class one freight railroads, such as Union Pacific Corp. ( UNP - Analyst Report ) and CSX Corp. ( CSX - Analyst Report ) .