Kansas City Southern's run for the border pays off

A rail link into the port of Lazaro Cardenas, on Mexico's Pacific coast, also puts Kansas City Southern in position to capitalize upon increased trade flows from Asia to the southern USA as well as Mexico's own economic growth. The port is 400 miles closer to Houston via rail than is the port of Los Angeles, where most Asian cargo lands in the USA.

Stiff headwinds

Still, Haverty, a fourth-generation railroad man, concedes he's got plenty of work to do before his Mexican and U.S. tracks are knitted into a seamless network. The company this year plans to reduce its number of locomotive models from 18 to two in a bid to boost efficiency. Mimicking cost-conscious Southwest Airlines, Haverty also wants to shave turnaround time, so that trains spend more time hauling cargo and less time parked in the yard.

With the U.S. economy near stall speed, analysts worry that Kansas City Southern's southern exposure won't be enough to offset its dependence upon industries that rise and fall with the economy. Only 40% of the railroad's revenue comes from businesses that are insulated from short-term economic ups and downs, such as coal for electricity generation or farm products. Burlington Northern Santa Fe bni, in contrast, derives 72% of its revenue from products that are sheltered from economic storms. "We believe the company will face stiff headwinds over the coming quarters," analyst Lee Klaskow of Longbow Research wrote in a Feb. 6 note.

Any U.S. downturn eventually will spill across the border and depress growth in Mexico. But assuming that the USA escapes with nothing worse than a couple of quarters of weakness, Kansas City Southern is betting that its trade ties will pay off.

Says Haverty: "Free trade has been great for our country. … We are clearly tied to that global traffic more than other railroads."

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