In the week ended March 5, 2016, Kansas City Southern (KSU) reported a fall of ~2% in intermodal traffic. While the traffic of containers went up by 0.32%, trailers refused to move ahead, dropping by a whopping 265 units, or by 59%, in the same week, compared with 651 units of traffic it saw during the same period last year.
Investors should note that KSU has operations in both US and Mexico. The fall in its intermodal traffic in the week ended March 5, 2016, was surprising against the marginal rise in intermodal traffic for the US. However, the fall was in line with the fall in Mexican intermodal traffic during the same period.
Why intermodal matters
KSU operates in Mexico through Kansas City Southern de Mexico, or KCSM. Investors should understand that in fiscal 2015, about 48% of the company’s revenues came from Mexico. Intermodal accounted for ~16% of KSU’s total revenues in 2015. In Mexico, the company has the sole concession to serve the Port of Lázaro Cárdenas. Located in Mexico on the Pacific coast, the deep-water seaport is one of the largest in Mexico.
Apart from seasonality, intermodal traffic is impacted by exclusive access to ports, highway to rail conversions, and levels of retail sales. KSU may witness some increased intermodal volumes in the second half of 2016. This is mainly due to an upcoming APMT container terminal at Lázaro Cárdenas, and this terminal is expected to be operational in the second half of the current year.
Competitors and ETFs
KSU’s US intermodal business competes with major western carriers like BNSF Railway (BRK-B) and Union Pacific (UNP). In Mexico, KCSM’s intermodal competes with Landstar System (LSTR), Trinity Logistics, and ByExpress Logistics.
Investors opting for a pure play in the transportation sector might consider investing in the iShares Transportation Average ETF (IYT), which has 21.8% of its portfolio in major US railroads and 11.5% in trucking companies.