A Eureka Moment For Kansas City Southern
July 29, 2009 15:06
The mantra of efficient market proponents is that all known information regarding a corporation becomes quickly priced into a stock price. However, on occassion, information that is publicly available, but not directly tied to a company, escapes Wall Street attention.
It takes a special kind of analyst to hunt down and piece together unrelated information to come up with good investing ideas. Randolph McDuff is one of these analysts. When he discovers the key piece of information that crystalizes an investment idea, he calls it a "eureka moment" and they have led to many of his most successful investments.
Recently, he had a eureka moment regarding Kansas City Southern. I'll let him explain his thinking in his own words.
Kansas city southern (KSU)
By: Randolph McDuff
I believe that for Kansas City Southern Railroads (KSU-NYSE, $17.50); a Eureka Moment occurred in August 2008.
In a nutshell, a series of little known and relatively unreported tax changes, imposed by the government of California in 2008, may eventually result in wholesale change to the flow of imports throughout western and central United States.
In the long term, California's actions could result in some very detrimental unintended consequences for Burlington Northern (BNI-NYSE, $74.55) and Union Pacific Railroads (UNP-NYSE, $56.54).
My prediction is that the single greatest unintended beneficiary of the change in trade flows will be Kansas City Southern. A secular windfall could accrue in the longer term, for new shareholders of KSU.
A sea change in the international shipping industry occurred in August 2008.
Little known to the general investing public, the State of California passed a series of levies and taxes. The intended victims are Asian producers and shippers of consumer goods to the United States. A series of new fees are now applied against international shippers. Port charges again these shippers have gone up by 160% in California.
State port taxes and levies now add an extra $160 per TEU, to the basic container handling charge in California.
Until recently, Asian exporters had few cost effective alternatives to getting goods into the United States. Consequently, California is earning taxation revenues that would be classified as confiscatory, and possibly illegal, by trading partners in other countries. Expressed as a percentage of the cargo values, port fees, dwell fees and taxes at California ports now exceed 5%, a global high.
Domestic shippers and outbound freight are largely exempted from the new tariffs and fees, and have remained very quiet about the tax changes. In the eyes of the legislative assemblies, this robbery appears to be a victimless crime.
To add insult to injury, the Longshoreman's union is doing to the west coast port industry, what the automotive unions did to the domestic auto business.
Average cash wages for the typical West Coast longshoreman exceeded $138,000 in 2008. This is the highest paying blue collar job in the world. Over and above the exorbitant wages, benefits are second to none. The union boasts full health care coverage without deductible, fully paid by the employer. In total, the average wage and benefits package per full time longshoreman exceeded $179,000 in 2008. (Source 1, Source 2)
In order to pay such ridiculous sums, a total of 9000 containers per employee, per annum, must be processed. With net margins on container handling at ports average about 20% globally, it appears that the most recent longshoreman's contract will push the two ports into the red, when container volumes drop below 15 million TEU.
The failure to reign in longshoremen's wages coupled with sharply increased shipping charges; has effectively priced California out of the international container business.
Unlike ports, vessels are mobile. The great shipping conglomerates of Asia can and will change where they will ultimately unload freight, as soon as an alternative port becomes available. Most of the Asian ships heading to the US come with fully loaded containers, and leave with empty containers. They are no ties to keep the shipments flowing through the US west coast, if a viable alternative may be found.
All that shippers require is a deepwater facility with direct access to roads and rails, and California will stand to lose every bit of container freight that can't be directly consumed within the state. More than 65% of total container volumes are at long term risk of displacement.
Highly efficient, cheap and modern port competition is now being built, due south of California.
Located on the Pacific coast of Mexico, Lazaro Cardenas is well positioned to become a key competitor to west coast container ports. The facility is managed by Hong Kong based Hutchison Port Holdings. Hutchison has strong ties to both the shipping industry in general and Chinese exporters specifically. Both moral suasion as well as preferred customer discounts can be applied, should Hutchison choose to divert freight from Los Angeles to their facility.
TEU charges are estimated to be $235 US at Lazaro. This compares very favourably to the $901 per TEU total charge levied at Long Beach.
Cardenas is ideally situated to capture Asian goods destined for the US Midwest and south, such as Chicago, Kansas City and Houston.
The port is quite new, and just in the first stages of start-up. In 2005, the port handled just 150,000 TEU. Current volumes are running at 220,000 TEU per annum.
The first expansion will allow for a total of 2.2 million TEU per annum to be processed. At full capacity over 4 million TEU annually may be handled.
Asian shippers are pragmatic
Rather than complain to deaf ears, they will simply work to bypass California completely. When Lazaro Cardenas and Punta Colonet (another proposed Mexican port) are fully operational, international shipping companies will save billions of dollars annually.
Lazaro Cardenas will benefit, as will all of Mexico. As the monopoly railroad provider to the port, so too, will Kansas City Southern Railway.
I have gently probed industry sources for several months, and have determined that the investment industry is completely apathetic to California's actions.
Not a single analyst has publicly questioned Kansas City Southern management since August 2008, regarding the change in California port charges. Also, to my knowledge, after having listened to the many conference calls held by BNI and UNP since that time, it appears that not a single buy or sell side analyst has queried the competition about the development.
Perhaps the largest potential driver of future revenue growth at KSU appears to be virtually unknown, and largely scoffed at, by those who should be highly attuned to the industry. As a long term investor, I couldn't be more excited by their collective inattention.
It takes a special kind of analyst to hunt down and piece together unrelated information to come up with good investing ideas. Randolph McDuff is one of these analysts. When he discovers the key piece of information that crystalizes an investment idea, he calls it a "eureka moment" and they have led to many of his most successful investments.
Recently, he had a eureka moment regarding Kansas City Southern. I'll let him explain his thinking in his own words.
Kansas city southern (KSU)
By: Randolph McDuff
I believe that for Kansas City Southern Railroads (KSU-NYSE, $17.50); a Eureka Moment occurred in August 2008.
In a nutshell, a series of little known and relatively unreported tax changes, imposed by the government of California in 2008, may eventually result in wholesale change to the flow of imports throughout western and central United States.
In the long term, California's actions could result in some very detrimental unintended consequences for Burlington Northern (BNI-NYSE, $74.55) and Union Pacific Railroads (UNP-NYSE, $56.54).
My prediction is that the single greatest unintended beneficiary of the change in trade flows will be Kansas City Southern. A secular windfall could accrue in the longer term, for new shareholders of KSU.
A sea change in the international shipping industry occurred in August 2008.
Little known to the general investing public, the State of California passed a series of levies and taxes. The intended victims are Asian producers and shippers of consumer goods to the United States. A series of new fees are now applied against international shippers. Port charges again these shippers have gone up by 160% in California.
State port taxes and levies now add an extra $160 per TEU, to the basic container handling charge in California.
Until recently, Asian exporters had few cost effective alternatives to getting goods into the United States. Consequently, California is earning taxation revenues that would be classified as confiscatory, and possibly illegal, by trading partners in other countries. Expressed as a percentage of the cargo values, port fees, dwell fees and taxes at California ports now exceed 5%, a global high.
Domestic shippers and outbound freight are largely exempted from the new tariffs and fees, and have remained very quiet about the tax changes. In the eyes of the legislative assemblies, this robbery appears to be a victimless crime.
To add insult to injury, the Longshoreman's union is doing to the west coast port industry, what the automotive unions did to the domestic auto business.
Average cash wages for the typical West Coast longshoreman exceeded $138,000 in 2008. This is the highest paying blue collar job in the world. Over and above the exorbitant wages, benefits are second to none. The union boasts full health care coverage without deductible, fully paid by the employer. In total, the average wage and benefits package per full time longshoreman exceeded $179,000 in 2008. (Source 1, Source 2)
In order to pay such ridiculous sums, a total of 9000 containers per employee, per annum, must be processed. With net margins on container handling at ports average about 20% globally, it appears that the most recent longshoreman's contract will push the two ports into the red, when container volumes drop below 15 million TEU.
The failure to reign in longshoremen's wages coupled with sharply increased shipping charges; has effectively priced California out of the international container business.
Unlike ports, vessels are mobile. The great shipping conglomerates of Asia can and will change where they will ultimately unload freight, as soon as an alternative port becomes available. Most of the Asian ships heading to the US come with fully loaded containers, and leave with empty containers. They are no ties to keep the shipments flowing through the US west coast, if a viable alternative may be found.
All that shippers require is a deepwater facility with direct access to roads and rails, and California will stand to lose every bit of container freight that can't be directly consumed within the state. More than 65% of total container volumes are at long term risk of displacement.
Highly efficient, cheap and modern port competition is now being built, due south of California.
Located on the Pacific coast of Mexico, Lazaro Cardenas is well positioned to become a key competitor to west coast container ports. The facility is managed by Hong Kong based Hutchison Port Holdings. Hutchison has strong ties to both the shipping industry in general and Chinese exporters specifically. Both moral suasion as well as preferred customer discounts can be applied, should Hutchison choose to divert freight from Los Angeles to their facility.
TEU charges are estimated to be $235 US at Lazaro. This compares very favourably to the $901 per TEU total charge levied at Long Beach.
Cardenas is ideally situated to capture Asian goods destined for the US Midwest and south, such as Chicago, Kansas City and Houston.
The port is quite new, and just in the first stages of start-up. In 2005, the port handled just 150,000 TEU. Current volumes are running at 220,000 TEU per annum.
The first expansion will allow for a total of 2.2 million TEU per annum to be processed. At full capacity over 4 million TEU annually may be handled.
Asian shippers are pragmatic
Rather than complain to deaf ears, they will simply work to bypass California completely. When Lazaro Cardenas and Punta Colonet (another proposed Mexican port) are fully operational, international shipping companies will save billions of dollars annually.
Lazaro Cardenas will benefit, as will all of Mexico. As the monopoly railroad provider to the port, so too, will Kansas City Southern Railway.
I have gently probed industry sources for several months, and have determined that the investment industry is completely apathetic to California's actions.
Not a single analyst has publicly questioned Kansas City Southern management since August 2008, regarding the change in California port charges. Also, to my knowledge, after having listened to the many conference calls held by BNI and UNP since that time, it appears that not a single buy or sell side analyst has queried the competition about the development.
Perhaps the largest potential driver of future revenue growth at KSU appears to be virtually unknown, and largely scoffed at, by those who should be highly attuned to the industry. As a long term investor, I couldn't be more excited by their collective inattention.