I was looking at the Price/earnings numbers for the Class 1 railroads, and came up with this-
BNSF 18.70
CSX 17.48
UP 16.34
NS 16.23
CN 14.40
CP 13.54
KCS 41.76
Do I have the right number for KCS (NYSE: KSU)?
Why is it so much higher than the others?
Dale,
This is a guess but I suspect that KCS earnings are way down while stock price has stayed relativly firm. That price has not dropped in line with earnings means that “the market” believes that the downturn is a short term problem and earnings will rise. Take a look at stock price and earnings over the past 3-5 years to test this hypothesis.
Mac
Yes - I believe that you have the right ticker symbol - KCU - for KCS.
Here’s a link to an article/column dated April 5, 2007 - “Jump on the Kansas City Southern Bandwagon: Super Growth Ahead” at - http://seekingalpha.com/article/31636-jump-on-the-kansas-city-southern-bandwagon-super-growth-ahead - which indicates that high of a ratio is not a new thing, and for some of the same reasons that Mac alludes to - so you may find it interesting.
Caution and disclaimer: Do your own research; I don’t own any and am not affiliated with KCS in any way.
Dale:
Good to see you back again.
Several points.
There are a few methods of computing PE. One is the price/earnings for the last fiscal year. Another is the TTM (trailing twelve months) and the third is Future PE, based on what the analyst forecasts the earnings are to be. For instance, Morningstar is the analyst I use. They show forward PE and have KSU at 36,8, CN at 14.8 and UP at 15.5.
Stock prices are not tied to their PE ratio, or their earnings. The stock prices are simply based on supply and demand. It is a bid/offer system. The marketplace has determined that KSU is worth $28.37 per share right now. People are willing to buy (and sell) at that price. Now, given that…PE is one of the factors that investors or speculators use to determine a fair value for the stock. It is a quick guideline, but should not be used as the only method.
For instance…a common guideline is PB or price to book. Right now KSU is at 1.4 x book value. CN is 2.0 as is UP. In other words, investors are willing to pay 2x the accounting value of CN or UP. They consider the value of the company to be higher than the value of the assets less liabilities. Dont confuse company value and asset value.
Now, lets say that KSU had a PE ratio of say…16, which seems to be similar to the other rails. That would place it’s PB ratio at around .53. Math (16/41.7 x 1.4…I took the "industry average PE and applied it to the book value of KSU). At 53 cents on the dollar, speculators would swoop in and buy the assets, in order to liquidate the property.
So, the price of the stock is being held higher for reasons only the market understands, but my quick anaylsis is that KSU is a valuable piece of real estat
Thanks Ed,
I’ll have to do some investigating (not investing) tonight.
So it is possible, but not probable, that some investors are hanging onto the stock thinking it could become a takeover target in the future?
Dale:
I think that is the probable reason. That and the value of the Speedway corridor and the line south of KC. They have invested heavily in the Nafta aspect of railroading…without results yet. Will those revenues and profits take form in the future? Cant say.
But remember my comparison of their book value vs normal railroads. At 53 cents on the dollar that will be snapped up quickly and then dismantled for the valuable assets. So, the market is considering the book value and the takeover value. Today it says it is worth $28 a share.
Dale, take a look around Morningstar’s website. Their basic website has considerable information. Their premium site has quite a bit more. You can take a 14 day free premium trial.
Ed