Should You Buy Kansas City Southern?

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The rail transport industry has been one of the better investments during the 21st century. These stocks collectively have gained several hundred percentage points. There are a couple of reasons for this:

  • These companies function as a de facto oligopoly. There are only a handful of these companies, and there is a very high barrier to entry given the capital and time required to construct thousands of miles of track.
  • Over the past several years, labor costs have increased. Not only have wages gone up, but the cost of hiring somebody has increased due to a more complicated regulatory environment. Rail transport requires fewer employees than truck transport, and so this added burden inherently hits the rail transport oligopoly’s primary competitor.
  • Not only have labor costs increased, but fuel costs have increased. Rail transport is more energy efficient than truck transport, and so this has given rail transport companies an additional advantage.
  • Rail transport companies are transporting things that they haven’t in the past, such as oil. They are also developing what is called “intermodal” transport, which is basically railroads transporting cargo that is easily moved from a truck to a ship to a train without loading or unloading the cargo.

Investors looking at rail transport companies can choose between a handful that operate across North America. The largest companies are slow and steady growers, and trade at around 15 to 18 times earnings. Investors who are looking for some more growth, but also more risk, might want to consider a smaller player: Kansas City Southern (NYSE:KSU).

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