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Here's Why Hold Strategy is Apt for Kansas City Southern
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Despite coronavirus-related woes, Kansas City Southern is backed by several tailwinds. With economic activities ramping up, despite being below year-ago levels, volumes have been improving modestly. During the second-quarter 2020 earnings call, management stated that overall carload volumes have increased approximately 39% after having bottomed in early May.
With volumes improving, the company resumed share repurchases in the second quarter. During the second quarter, it repurchased 699,000 shares at an average price of $143.05 per share. Return to shareholders is up 72% year to date (as of Jul 17), thanks to a 106% increase in share repurchases. Notably, the company had suspended share buybacks in the first quarter to address coronavirus-related challenges on its operations.
Given the company’s solid free cash flow-generation capacity, we expect an uptick in such shareholder-friendly activities. Kansas City Southern’s year-to-date (as of Jul 17) free cash flow is up 35% year over year. The company is committed to generate free cash flow of $500 million or more in 2020.
Additionally, benefits of the precision-scheduled railroading (“PSR”) model are supporting Kansas City Southern’s bottom line. Thanks to the PSR model, an operating model that reduces costs and leads to optimal asset utilization, the company’s operating expenses have declined significantly. In 2019, the company realized PSR savings of $58 million, while in 2020 it expects to generate PSR savings of $95 million.
The United States–Mexico–Canada Agreement (“USMCA”), which came into force on Jul 1, is a major boon to the company. Replacing the 25-year-old North American Free Trade Agreement (“NAFTA”), the USMCA streamlines North American trade and is expected to drive growth of Kansas City Southern through increased volumes.
Kansas City Southern has a sound liquidity position, which makes it well-placed to efficiently tackle adversities on its business. The company’s short-term debt stood at $16.3 million at the end of the second quarter, way below its cash and cash equivalents of $620.1 million, indicating that the company has sufficient cash to meet its short-term debt obligations.
Owing to these tailwinds, shares of the company have rallied more than 20% so far this year, outperforming the industry’s 6.6% increase.
In light of these positives, we believe Kansas City Southern is a stock with substantial growth potential and hence investors should retain this Zacks Rank #3 (Hold) company in their portfolios.
Shares of Knight Swift, Werner and Canadian Pacific have rallied 24%, 22.7% and 14.2% so far this year.
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Here's Why Hold Strategy is Apt for Kansas City Southern
Despite coronavirus-related woes, Kansas City Southern is backed by several tailwinds. With economic activities ramping up, despite being below year-ago levels, volumes have been improving modestly. During the second-quarter 2020 earnings call, management stated that overall carload volumes have increased approximately 39% after having bottomed in early May.
With volumes improving, the company resumed share repurchases in the second quarter. During the second quarter, it repurchased 699,000 shares at an average price of $143.05 per share. Return to shareholders is up 72% year to date (as of Jul 17), thanks to a 106% increase in share repurchases. Notably, the company had suspended share buybacks in the first quarter to address coronavirus-related challenges on its operations.
Given the company’s solid free cash flow-generation capacity, we expect an uptick in such shareholder-friendly activities. Kansas City Southern’s year-to-date (as of Jul 17) free cash flow is up 35% year over year. The company is committed to generate free cash flow of $500 million or more in 2020.
Additionally, benefits of the precision-scheduled railroading (“PSR”) model are supporting Kansas City Southern’s bottom line. Thanks to the PSR model, an operating model that reduces costs and leads to optimal asset utilization, the company’s operating expenses have declined significantly. In 2019, the company realized PSR savings of $58 million, while in 2020 it expects to generate PSR savings of $95 million.
The United States–Mexico–Canada Agreement (“USMCA”), which came into force on Jul 1, is a major boon to the company. Replacing the 25-year-old North American Free Trade Agreement (“NAFTA”), the USMCA streamlines North American trade and is expected to drive growth of Kansas City Southern through increased volumes.
Kansas City Southern has a sound liquidity position, which makes it well-placed to efficiently tackle adversities on its business. The company’s short-term debt stood at $16.3 million at the end of the second quarter, way below its cash and cash equivalents of $620.1 million, indicating that the company has sufficient cash to meet its short-term debt obligations.
Owing to these tailwinds, shares of the company have rallied more than 20% so far this year, outperforming the industry’s 6.6% increase.
In light of these positives, we believe Kansas City Southern is a stock with substantial growth potential and hence investors should retain this Zacks Rank #3 (Hold) company in their portfolios.
Key Picks
Some better-ranked stocks in the broader Transportation sector are Knight Swift Transportation Holdings Inc (KNX - Free Report) , Werner Enterprises Inc (WERN - Free Report) and Canadian Pacific Railway Limited (CP - Free Report) . While Knight Swift and Werner sport a Zacks Rank #1 (Strong Buy), Canadian Pacific carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Shares of Knight Swift, Werner and Canadian Pacific have rallied 24%, 22.7% and 14.2% so far this year.
Zacks Top 10 Stocks for 2020 Buy
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2020?
Last year's 2019 Zacks Top 10 Stocks portfolio returned gains as high as +102.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.
Access Zacks Top 10 Stocks for 2020 today >>