Challenges Hound Kansas City Southern: Time To Offload?

Shares of Kansas City Southern KSU have underperformed the industry it belongs to in the last six months on multiple headwinds. The stock has gained 2.6% compared with the industry's 4.8% rise.

The company has been plagued by high costs for quite some time. Continuing from the previous quarter, high operating expenses are likely to hurt the company's bottom line in the first quarter of 2018 as well. Last quarter, the metric increased 9%, mainly due to rise in fuel costs, which grew 20.5%.

Declining volumes at the Agriculture & Minerals unit might further hamper results in the first quarter. We remind investors that volumes at this sector contracted 9% in fourth-quarter 2017 on weaknesses in grain and food products.

The uncertainty over the North American Free Trade Agreement (NAFTA) negotiations is a major overhang on the stock. This is because the railroad operator draws a significant portion of its revenues from U.S.-Mexico shipments.

Kansas City Southern's trailing 12-month return on equity (ROE) undercuts its growth potential. Not only has the company's ROE of 12.1% gradually decreased over the past year, it also compares unfavorably with the ROE of 20.4% for its industry and 16% for the S&P 500 Index.

In light of these downsides, it is advisable for investors to discard the stock from their portfolio for now.

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