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Did Kansas City Southern Overreact to Trump’s Success?

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Nov. 20 2020, Updated 2:38 p.m. ET

Kansas City Southern

Following Trump’s success in the US presidential election, Kansas City Southern’s (KSU) stock nosedived nearly 11% on November 9, 2016. Eastern US railroad stocks (NSC) (CSX) celebrated Trump’s prospective entry into the White House. Why did the smallest Class I railroad stock catch a cold?

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Kansas City Southern’s Mexico connection

KSU operates Kansas City Southern de Mexico (or KCSM), a wholly owned subsidiary in Mexico. KCSM has a 50-year concession of rights from the Mexican government, expiring in 2047 unless extended. Under this concession, KCSM operates 3,200 route miles and 550 miles of trackage rights in Mexico.

The company operates a core route, which is the shortest and most direct rail passage between Mexico City and Laredo, Texas. Laredo, a border city, is an international gateway between the United States and Mexico. This border city accounts for more than 50% of all rail and truck traffic between the two countries.

Trump’s views on Mexico

Note that Donald Trump has been very vocal against the idea of alleged illegal immigrants from Mexico settling in the United States. He even went to the extent of suggesting building a wall on the US-Mexico border and discussing it with his Mexican counterpart Peña Nieto.

The newly elected US president felt that Mexico had hugely benefited from its trade agreements with the United States. According to Bloomberg, some Canadian trade insiders believe Trump’s entry in the White House could spell doom for NAFTA (North American Free Trade Agreement). Note that NAFTA is an agreement between the United States, Canada, and Mexico. Trump said that NAFTA was the worst trade deal ever signed by the United States and that it continues to eliminate US jobs.

Repercussions on KSU

Trump’s views on emerging nations and its immediate neighbor Mexico could impact KSU’s business prospects in many ways, including confining the Mexican network and tightening labor laws to create a more friendly environment for KSU’s rival Ferromex Rail in Mexico. This, in turn, could impact KSU’s Mexican operations, which account for almost 48% of the company’s total freight revenue.

Investors looking for exposure to the transportation and logistics space can invest in the Industrial Select Sector SPDR ETF (XLI). This ETF invests ~9% in major US road (JBHT) and rail (UNP) companies and 5.6% in airlines (DAL).

For more information on major US railroad stocks, visit Market Realist’s Railroads page.

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