Name: HR 1748 Safe Freight act.
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Employed as: Conductor, for 10-20 years
Posted: 02 August 2020
Get the facts brothers. Do your research don’t believe anything till you
see the proof.
KCS Isn’t For Sale. Quit Salivating
Written by William C. Vantuono, Editor-in-Chief
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The Weather Network/Keith Bradley
If I had a $100,000 for every time the rumor mill shouted out that
Kansas City Southern was on the auction block, I’d be a
multi-millionaire with a collection of exotic cars rivaling that of Jay
Leno, and racing a Corvette C8.R in the IMSA Series, with my son Craig
as crew chief. (I wouldn’t own a private railcar, because Amtrak
wouldn’t want to haul it around the country, and if they did, they’d
probably overcharge me. But that’s another story.)
First, the buzz that restarted the cranky old rumor mill engine (no
doubt coal-fired, and you know where that’s headed):
“Kansas City Southern (KSU) breaks higher after Betaville reports on
speculation about a potential acquisition bid from BNSF Railway, Union
Pacific, or an infrastructure fund. The company hasn’t commented on the
report. (No s__t, Sherlock, as we used to say in my Newark, N.J.
hometown.) The takeover chatter (mockingbirds, perhaps?) about KSU
arrives after Bank of America singled it out as a top transportation
sector pick. (Trying telling us something we don’t already know.)
William C. Vantuono photo. Yes I took this. It’s my neighbor’s friendly
cat, minding his own business, and being harassed by a mockingbird with
a nearby nest the cat has no interest in attacking.
“Bank of America says Kansas City Southern is still one of its top
picks in the transportation sector. ‘We believe KSU is among the best
in terms of operating leverage potential among the Class I’s as the
second derivative of volumes inflect, with runway (an airline term?
Gimmee a break!) for further train consolidations in its Manifest
segment, and a more refined Auto network,’ notes the firm. The
longer-term potential for supply chain near-shoring in Mexico when
USMCA goes into effect July 1 is also noted (correct!). BofA sees
Kansas City Southern still generating +$600M in free cash flow this
year. (Actually, it’s +600MM. An “M” means 1,000, which would translate
into $600,000. So “MM” is 1,000 x 1,000, or one million. Roman numerals,
man!) A Buy rating is kept in place on KSU, and the new price objective
of $168 is above the average sell-side PT (price target) of $151.68.”
Potentially, but no doubt unintentionally, stoking the rumor mill was a
very positive report from Cowen and Company, following a virtual
pre-2Q2020 earnings visit with KCS top management, among them our 2020
Railroader of the Year, Pat Ottensmeyer:
“KSU leveraged a weak volume environment to create a lower cost basis,
which should enable stronger margins in 2H2020. Opportunities exist for
further cost cuts including fuel efficiency and lengthening trains.
Intermodal only has HSD (high single digit) share in Mexico, and KSU
can also grow its share vs. truck. We adjust our estimates, modestly
raise our PT to $156 (sounds more realistic), and reiterate KSU as our
top rail pick.
“KSU pre-announced certain 2Q20 items, including revenue of roughly
$550MM (got those Roman numerals right. Way to go, Jason Seidl!), which
was slightly below our $591.4MM. ($41.4MM is “slightly below”???) The
revenue miss was unsurprising, given KSU’s carloads thus far in 2Q,
which were below our estimate, as well as the negative impact of fuel
on average revenue per carload. In addition, KSU expects roughly $4MM
of incremental COVID-19 related costs and slightly higher casualty
expense this quarter. However, KSU’s cost reductions in the quarter
were much more significant than we had anticipated, offsetting some of
the lower revenue.
“In recent weeks, KSU, along with the rest of the North American Class
I railroads, has seen carloads begin to recover as states reopen from
COVID-19 (and coronavirus cases start to rise). Nearly all the auto
plants in Mexico reopening has breathed life into that business, with
June auto volumes down 39%, compared to down ~93% for the first two
months of the quarter. Intermodal, which in some cases contains auto
parts, is also benefiting from the factory openings. Finally, even
areas least affected by COVID-19, such as grain and other agricultural
carload types, are seeing improvements. Even though it is an essential
business where most employees cannot simply work from home, KSU
fortunately only has 10 active COVID-19 cases out of 7,000 employees, 6
in the U.S. and 4 in Mexico. It hasn’t had any major labor issues with
crews testing positive and hasn’t had any service interruptions.
(That’s what good management, and caring about employees, does.)
“As the world recovers from COVID-19, KSU has numerous drivers for
top-line growth. Its Intermodal franchise can benefit from gaining
share in the market (with only HSD share currently) and from the
overall market growing. In international Intermodal specifically, KSU
has lots of capacity available at Lázaro Cárdenas. KSU has opportunity
to grow in refined products, with customers moving into Mexico and in
energy segments other than coal (a dying commodity) and frac sand.
Finally, its Plastics franchise is currently seeing the impact of
overcapacity in the Gulf and global economy, but still has longer-term
growth potential.
“Management drew a contrast between the growth potential of KSU and the
rest of the Class I’s. Mexico has factories that are growing and new
factories being built, while growth at factories in the U.S. and Canada
is occurring less, and there are factories that are closing. Like its
counterparts in the U.S., KSU’s intermodal franchise competes with
truck; in KSU’s case, the competition is also affected by currency, as
KSU bills in dollars and truckers bill in pesos. With the Mexican peso
well below the U.S. dollar, KSU’s competitiveness in the market is
limited. Each quarter, KSU evaluates whether it would be worthwhile (on
both a revenue and margin basis) to switch to pesos, and there is no
question that the status quo is worthwhile. Conversely, KSU’s
cross-border business with BNSF has held in 2020, even amid COVID-19.”
All of the above is representative of a good railroad, with good
management focused on long-term, top-line growth and long-term
shareholder value. This is what Mike Haverty (2001 Railroader of the
Year) had in mind when he tamped down the naysayer volume more than 25
years ago and bought into Mexico’s then-privatizing railroad network.
It continued under Dave Starling (2001 Railroader of the Year) and is
accelerating under Pat Ottensmeyer, bolstered by USMCA, a trade pact he
helped broker.
In case you’ve forgotten, take another look at Ottensmeyer’s viewpoint
from his Railroader of the Year interview, when I remarked, “My
experience with Kansas City Southern goes back to the mid-1990s. There
are two things that come to mind: Never complacent. Fiercely
independent.” His answer:
“I would agree with that. Maybe some of it is our size. We’ve got to be
on our toes because we’re surrounded by companies that are much larger
than we are. Complacency would be very troublesome for our company.
Fiercely independent? I would say the nature of our fierce independence
has changed over time. A big part of our strategy for the past several
years—this is really important—is the way we can connect, our
philosophical approach, our desire and willingness to work with the
other carriers to get to markets and offer our customers and their
customers service options that we wouldn’t have, just based on our own
network.
“So that again is a very important part of our strategy, more so than
most of the other large railroads. Because of our size, of where we’re
located, the strategy of developing service options with our connecting
carriers and our partners in the railroad industry is very important. I
also think a really important part of our value proposition to our
customers is that independence. If you’re an auto company building a
new plant in central Mexico and you want service options to both
railroads in the East, we’re happy to do it. If you want service
options to both railroads in Canada, we’re happy to do it. I think we
are more valuable to our customers because of our ability and our
willingness to do that. If we were part of a bigger network, it might
not be so easy.”
Any doubts about KCS’s strong, independent stance?
Expanding upon what Pat Ottensmeyer said, there are other reasons why
Kansas City Southern isn’t up for grabs. There might be “private-equity
infrastructure investment funds … poised to scoop up a Class I for its
future cash-flow stream, as Brookfield Infrastructure Partners acquired
small-railroad holding company Genesee & Wyoming for $6.5 billion,”
Capitol Hill Contributing Editor Frank N. Wilner wrote in April, but
bear in mind that KCS’s price tag would most likely be beyond the scope
of a private-equity fund.
As far as another Class I attempting an acquisition, regulators
probably won’t have the stomach or patience right now to deal with the
ramifications of a huge acquisition.
Customers as well, particularly those suffering from severe indigestion
induced by railroads whose attitude toward Precision Scheduled
Railroading is “take it or leave it” (KCS is not one of them) will push
back. “If propping up stock price becomes a takeover defense, shippers
may wave before lawmakers and regulators the Oct. 8, 1882, unfortunate
‘public be damned’ response of railroad baron William Henry Vanderbilt
when asked, ‘Are you working for the public or for your stockholders?’”
Wilner noted.
The activist hedge funds (think Bill Ackman and Paul Hilal) are not
going to emerge from their lairs with a hostile takeover in mind. These
people go after companies they perceive as weak or underperforming in
the “space” that interests them. They charge in, guns blazing, turn the
company upside down, shake and squeeze it violently, slice off the
pieces falling out the bottom, and toss a hand grenade into the pieces.
The explosion catapults the stock price high into the air. They then
cash out as quickly as they charged in.
These hedge funds often require a God-like figure to enlist in carrying
out their mission. Their single motivation is enriching their personal
coffers, under the guise of “delivering value to shareholders.” Kansas
City Southern is well-run, anything but under-performing. Its 1Q2020
operating ratio—the one performance measure to which Wall Street pays
the most attention—was 59.7%. And there is no God-like figure, no cult
of personality, at present, to help the hedge funds.
The industry, like much of the world, is suffering from the COVID-19
pandemic. Railroads—Kansas City Southern included—are taking temporary
cost-cutting measures to deal with depressed traffic levels, until
things return to “normal,” whatever that might be. The furthest thing
from management’s mind is consolidation, as well as dealing with
regulators, potentially disgruntled customers, and rail labor, which is
currently in the midst of national bargaining.
So, if there’s anyone out there salivating at the thought of acquiring
Kansas City Southern, take a napkin and wipe the drool from your chin,
because it ain’t happening. Not now.
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