Stocks to Buy: #1 KSU

KSU – Kansas State Railroad.
NAFTA created a strong Mexico-US economic connection that has been hindered by 1950s era shipping infrastructure. Highways and railroads are almost 50 years old and older. Massive port refurbishment meant that shipping products to the US was easier. But even that infrastructure has been overwhelmed as imports from Asia (especially China) are greater than the LA, Long Beach and Oakland port systems can manage.
Shipping costs can double the cost of cheap Chinese products bound for Target, Walmart, Home Depot and elsewhere.
Unlike the East Coast where longshoremen compete with non-Union ports and Mexican ports, West Coast ports lack competition. They went on strike in 2002 and brought the economy to a brief halt. Pacific Coast dockworkers make $140,000 on average, with foremen making almost $200,000. By comparison, Mexican dockworkers earn $10,000. Combine that much higher cost with surging imports from Asia, and you have a problem waiting for a solution.
In other words, US businesses shifted focus away from Mexican cheap labor (maquillederos) and focused on China. Labor costs are no longer the problem: shipping costs are.
A number of groups in China, Mexico and the US have banded together to build a new superhighway through the US heartland. Their solution is to bypass the US port system altogether and ship via Mexico.
Step 1 – Ship to a Lazaro Cardenas, a refurbished Mexican port and the deepest port in Mexico. It is closer to Houston and the East Coast than shipping via LA or Long Beach Status: built
Step 2 – Load onto Railroads. Status: built
Step 3 – Create a fast system for trucking and freight using electronic wireless tags. Status: built and in use today
Step 4 – Upgrade customs centers. Status: Kansas city now has a Mexican Customs office
Step 4 – Ship to new distribution centers based in the mid-west. Think Walmart, target & Home Depot among others. Status: being built

This is where we focus on KSU. They bought Mexico’s largest train system. They are the only train system running from Lazaro Cardenas. They offer a seamless link between LC and the entire US Midwest as well as into Mexico. That Mexican customs office: based in Kansas City where KSU is headquartered. Oh, and KSU also owns 50% of the Panama Canal Train system – so they can also offer a linkage there as well.

Who benefits? Think Walmart. Walmart now has a low cost alternative to West Coast ports. Also, Walmart Mexico is huge. From out of nowhere, KSU now matters to Walmart. As a result, Hutchinson Wampoa is building a massive $200M port system for China-US shipping – in Lazaro Cardenas. Also consider car companies in Detroit and the Southeast: KSU offers an attractive alternative.

KSU benefits in a few ways.
Massive revenue growth. They are expected to become the shipper of choice for major importers like Home Depot, Walmart, and others.
Faster earnings growth. Mexican rail workers are much cheaper and will be allowed into the US.
Economies of size. They will be in a position to squeeze cost savings from suppliers.
While it is too early for the port system to add money, the efficiency gains are there: margins are growing sequentially and Y/Y. So earnings are rising.