Mexican proposal threatens KCS bottom line

Shares of Kansas City Southern have been hammered as investors react to actions by Mexico's legislature which could seriously impact the Class I railroad's bottom line.

KCS stock fell sharply Tuesday, Feb. 18, 2014, falling 4.5%, after a selloff earlier this month of even greater proportion. Wall Street analysts said investors are reacting negatively to a bill in the Mexican legislature that would open Kansas City Southern’s government-sanctioned rail operation there to new competition.

Bloomberg News reported that a note from JPMorgan analyst Thomas Wadewitz said the proposed legislation had a “meaningful probability” of becoming law and would hurt KCS’s pricing potential. KCS offers substantial north-south rail service linking Mexico and the U.S.

In a statement, KCS said the proposed changes are not yet a fait accompli, but also said the changes “would not lower prices or broaden the railroad’s share of business; instead it would reduce investment and confidence in Mexico, create uncertainty in an industry that has helped Mexico’s manufacturing economy to flourish, and potentially disrupt the current operation of the Mexican rail network.”

Mexican law also would provide “remedies to concessionaires against the breach of the rights under their concession titles” and the North American Free Trade Agreement (NAFTA), KCS said.

Earlier this month Mexico’s lower house of Congress passed a bill to encourage rail freight competition with the nation’s two current operators, KCS subsidiary Kansas City Southern de Mexico and Grupo Mexico’s two rail arms, Ferromex and Ferrosur.