Kansas City Southern (NYSE:KSU) represents a huge part of our past, and a substantial part of our present as well. The rail network, which features around 6,700 miles of track throughout the United States and Central America, recently became the subject of a bidding war to see the company sold off and its access to Mexico made available. Kansas City was up 15.2% at one point in trading recently and has gained even further into today's trading as of this writing.
Landing the Big Train Line
In the most recent development, so far, Canadian National Railway (NYSE:CNI) recently put down an offer of $33.7 billion in cash and stock for Kansas City Southern, which handily tops the previous offer of $25 billion in cash and stock made last month by Canadian Pacific (NYSE:CP).
Reports suggest that both companies are interested in Kansas City Southern primarily for Kansas City Southern's extensive access into Mexico. That access is especially prized now, following the recently-minted trade deal struck under President Trump that was originally designed to fuel investment and trade throughout North America.
Despite Canadian National Railway's substantially higher offer, reports noted that, following the receipt of the offer, Kansas City Southern and Canadian Pacific issued a joint press release in which they noted support for the Canadian Pacific offer. The release cited letters from over 400 shippers and similar stakeholders—several statements were released to this effect last month as well—that noted support for the deal with Canadian Pacific. The biggest reason behind this seems to be a matter of competition; should Canadian National end up with Kansas City Southern, the result would shake up the current level of competition in the field as many of Kansas City Southern's rail lines competed with Canadian National's. Canadian Pacific, however, would prove more complementary, and would still ultimately be the smallest railroad even with Kansas City Southern's service in support.
Analysts Remain Interested
As for the broader analyst pool, our latest research suggests a solid core of “buy” interest, as the company has held a consensus “buy” rating for the last two years. While the ratios have shifted, they seem to be shifting in the right proportions to maintain a bullish stance.
A year ago, the company had 11 “buy” ratings and 10 “hold” ratings to its credit. Six months ago, meanwhile, that shifted to 12 “buy” and nine “hold”. Three months ago, that shifted again to 12 “buy” and eight “hold”. Today, however, we're at nine “buy” and just five “hold”, suggesting more than anything that analysts are departing the field altogether as opposed to making evaluations.
The price target, meanwhile, runs a surprisingly broad range. The average currently holds at $231.20, with a high of $286 and a low of $162. Interestingly, that new high was established just two days ago as Raymond James raised the target from $255 to $286, while at the same time lowering its evaluation to “outperform” from “strong-buy”. Such a move follows on the heels of Wells Fargo & Company downgrading from “overweight” to “equal weight” and Vertical Research initiating coverage at “hold”. JPMorgan Chase, however, upgraded recently from “neutral” to “overweight”, and raised the price target from $231 to $275 right alongside it.
A Vital Piece of Currently-Valuable History
While it would be easy to think that rail service is an outmoded part of the transportation industry, when it comes to transporting goods, it's still a vital part of everyday life. Reports suggest that rail freight volumes in the US increased throughout much of the latter half of the 2010s, though the decade's high-water mark comes in at 2014. With the recently-launched new trade pact, rail lines are already reporting substantial gains; over the last week, all six major railroad operations reported increases in volume measured in double-digit figures. That compares marvelously to this time last year, when coronavirus restrictions sent rail shipping volumes plummeting. With these restrictions loosening or even gone in some cases, rail shipping appears to be recovering accordingly.
The issue of competition is, of course, a vital one, and may well ultimately prevent a deal from going through to begin with if regulatory bodies get involved. It may seem counterintuitive, but going with the lower bid here may ultimately be the best one due to impact on competition in the field. Still, it's looking like, one way or another, Kansas City Southern is about to be sold off. Feel free to look into a buy up to the limit of Canadian Pacific's offer, despite the potential for higher, if more unlikely realized, gains from Canadian National. Perhaps, however, consider picking up Canadian Pacific instead. It's more likely to come out with Kansas City Southern's service than Canadian National is, despite a clearly higher bid.
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