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Kansas City Southern (KSU) Surges 11.1%: Is This an Indication of Further Gains?

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Kansas City Southern (KSU - Free Report) shares soared 11.1% in the last trading session to close at $249.09. The move was backed by solid volume with far more shares changing hands than in a normal session. This compares to the stock's 8.6% gain over the past four weeks.

The upside was owing to the news that Kansas City Southern will be taken over by Canadian Pacific Railway Limited. The enterprise value of the cash-and-stock deal is approximately $29 billion and includes the assumption of $3.8 billion of outstanding debt of Kansas City Southern. However, the deal will be effective only after the completion of a two-step process. The first step will see Canadian Pacific form a “plain vanilla”, an independent voting trust to acquire the shares of the target company. Upon shareholder approval of the transaction and meeting other conditions, Canadian Pacific will acquire the shares and place the same into the voting trust.

Post this action, which is expected in the second half of the current year, shareholders of Kansas City Southern will receive their stipulated portion. Notably, common shareholders of Kansas City Southern will receive 0.489 per Canadian Pacific share in addition to $90 in cash for each Kansas City Southern common stock held.

Under the final step, approval by the U.S. Surface Transportation Board (STB) and other applicable regulatory authorities is needed. The STB is expected to complete its review by the middle of 2022.

Price and Consensus

Price Consensus Chart for KSU

This railroad company is expected to post quarterly earnings of $2.05 per share in its upcoming report, which represents a year-over-year change of +4.6%. Revenues are expected to be $720.39 million, down 1.6% from the year-ago quarter.

Earnings and revenue growth expectations certainly give a good sense of the potential strength in a stock, but empirical research shows that trends in earnings estimate revisions are strongly correlated with near-term stock price movements.

For Kansas City Southern, the consensus EPS estimate for the quarter has been revised 2.4% lower over the last 30 days to the current level. And a negative trend in earnings estimate revisions doesn't usually translate into price appreciation. So, make sure to keep an eye on KSU going forward to see if this recent jump can turn into more strength down the road.

The stock currently carries a Zacks Rank 2 (Buy). You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>

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