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Will USMCA Arrest Kansas City Southern's Underperformance?

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Uncertainty related to the North American Free Trade Agreement (NAFTA) was finally put to rest when Canada finally decided to be part of the revamped trade deal on Sep 30, 2018.  The new trade deal includes the United States and Mexico as well.

Notably, the latest deal replaces the NAFTA and is currently known as the United States-Mexico-Canada Agreement (USMCA). We remind investors that, in August, the United States had signed an agreement with Mexico for a new trade deal to rewrite NAFTA.

Canada’s decision to sign the trilateral agreement comes after intense negotiations and allays fears that the trade deal might go ahead without Canada. In fact, last month, President Trump had threatened to dump Canada and ink a bilateral trade deal with Mexico.

In 1994, the United States, Canada and Mexico signed the original NAFTA in a bid to secure better terms for domestic workers. President Trump, however, believed that the deal wasn’t in favor of American workers. Since he took office, Trump has been looking to revamp the deal. Thus, the signing of USMCA can be seen as a victory for Trump.

Canada’s move to be part of the new trade deal resulted in the rally in Canadian dollar and the Mexican peso. The U.S. market is also expected to open on a strong note following the update.

USMCA Puts Kansas City Southern in Focus

Stocks belonging to the Zacks Rail industry should benefit from the latest trade agreement. This is because it will ease the impacts of big tariffs on Mexico that could disrupt supply chains and rail shipments throughout North America.

Among US-based railroads, Kansas City Southern (KSU - Free Report) is likely to gain substantially as it derives significant part of its revenues from Mexico. In fact, the long-standing uncertainty regarding NAFTA resulted in the stock underperforming its industry in a year’s time. Shares of this Kansas City, MO-based railroad operator have gained 5.8% compared with its industry’s 29.1% rally. The company’s Zacks Rank #4 (Sell) further highlights its struggles.

 

However, with USMCA in place, the stock is expected to receive a boost. Naturally, we expect investor focus to remain on whether USMCA succeeds in reviving the fortune of this key railroad operator.

Stocks to Consider

A few better-ranked stocks in the broader Transportation Sector are Trinity Industries, Inc. (TRN - Free Report) , Old Dominion Freight Line, Inc. (ODFL - Free Report) and Matson, Inc. (MATX - Free Report) . While Trinity and Old Dominion carry a Zacks Rank #2 (Buy), Matson sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Trinity, Old Dominion and Matson have gained 15.7%, 13.9%, and 41.3%, respectively, in the past six months. 

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