Intrinsic value of Kansas City Southern - KSU

Previous Close

$119.50

  Intrinsic Value

$32.75

stock screener

  Rating & Target

str. sell

-73%

Previous close

$119.50

 
Intrinsic value

$32.75

 
Up/down potential

-73%

 
Rating

str. sell

We calculate the intrinsic value of KSU stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 12.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.10
  5.09
  5.08
  5.07
  5.07
  5.06
  5.05
  5.05
  5.04
  5.04
  5.03
  5.03
  5.03
  5.03
  5.02
  5.02
  5.02
  5.02
  5.02
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.01
  5.00
Revenue, $m
  2,852
  2,998
  3,150
  3,310
  3,477
  3,653
  3,838
  4,032
  4,235
  4,448
  4,672
  4,907
  5,154
  5,413
  5,685
  5,970
  6,270
  6,585
  6,915
  7,262
  7,625
  8,008
  8,409
  8,830
  9,272
  9,736
  10,224
  10,736
  11,273
  11,837
Variable operating expenses, $m
  1,446
  1,520
  1,597
  1,678
  1,763
  1,852
  1,946
  2,044
  2,147
  2,255
  2,369
  2,488
  2,613
  2,744
  2,882
  3,027
  3,179
  3,338
  3,506
  3,682
  3,866
  4,060
  4,263
  4,477
  4,701
  4,936
  5,184
  5,443
  5,715
  6,001
Fixed operating expenses, $m
  369
  377
  385
  394
  402
  411
  420
  430
  439
  449
  459
  469
  479
  490
  500
  511
  523
  534
  546
  558
  570
  583
  595
  609
  622
  636
  650
  664
  679
  693
Total operating expenses, $m
  1,815
  1,897
  1,982
  2,072
  2,165
  2,263
  2,366
  2,474
  2,586
  2,704
  2,828
  2,957
  3,092
  3,234
  3,382
  3,538
  3,702
  3,872
  4,052
  4,240
  4,436
  4,643
  4,858
  5,086
  5,323
  5,572
  5,834
  6,107
  6,394
  6,694
Operating income, $m
  1,037
  1,101
  1,168
  1,238
  1,312
  1,390
  1,472
  1,558
  1,649
  1,744
  1,845
  1,951
  2,062
  2,179
  2,302
  2,432
  2,569
  2,712
  2,863
  3,022
  3,189
  3,365
  3,550
  3,745
  3,949
  4,164
  4,391
  4,629
  4,879
  5,142
EBITDA, $m
  1,401
  1,483
  1,569
  1,660
  1,755
  1,855
  1,961
  2,072
  2,189
  2,311
  2,440
  2,576
  2,719
  2,869
  3,027
  3,193
  3,368
  3,552
  3,745
  3,948
  4,161
  4,386
  4,622
  4,870
  5,131
  5,406
  5,694
  5,997
  6,316
  6,651
Interest expense (income), $m
  84
  145
  158
  171
  185
  200
  216
  232
  249
  267
  286
  306
  326
  348
  371
  395
  420
  446
  474
  503
  534
  566
  600
  635
  672
  711
  752
  795
  840
  888
  937
Earnings before tax, $m
  892
  943
  996
  1,052
  1,112
  1,174
  1,240
  1,309
  1,382
  1,458
  1,539
  1,624
  1,714
  1,808
  1,908
  2,012
  2,122
  2,238
  2,360
  2,488
  2,623
  2,765
  2,915
  3,072
  3,238
  3,412
  3,596
  3,789
  3,991
  4,205
Tax expense, $m
  241
  255
  269
  284
  300
  317
  335
  353
  373
  394
  416
  439
  463
  488
  515
  543
  573
  604
  637
  672
  708
  747
  787
  830
  874
  921
  971
  1,023
  1,078
  1,135
Net income, $m
  651
  688
  727
  768
  812
  857
  905
  955
  1,009
  1,065
  1,124
  1,186
  1,251
  1,320
  1,392
  1,469
  1,549
  1,634
  1,723
  1,816
  1,915
  2,019
  2,128
  2,243
  2,364
  2,491
  2,625
  2,766
  2,914
  3,070

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  9,939
  10,445
  10,975
  11,532
  12,116
  12,729
  13,372
  14,047
  14,756
  15,499
  16,280
  17,099
  17,959
  18,861
  19,808
  20,803
  21,847
  22,943
  24,094
  25,301
  26,570
  27,901
  29,299
  30,766
  32,307
  33,925
  35,623
  37,406
  39,279
  41,245
Adjusted assets (=assets-cash), $m
  9,939
  10,445
  10,975
  11,532
  12,116
  12,729
  13,372
  14,047
  14,756
  15,499
  16,280
  17,099
  17,959
  18,861
  19,808
  20,803
  21,847
  22,943
  24,094
  25,301
  26,570
  27,901
  29,299
  30,766
  32,307
  33,925
  35,623
  37,406
  39,279
  41,245
Revenue / Adjusted assets
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
  0.287
Average production assets, $m
  8,982
  9,439
  9,919
  10,422
  10,950
  11,504
  12,086
  12,696
  13,336
  14,008
  14,713
  15,453
  16,230
  17,046
  17,902
  18,801
  19,744
  20,735
  21,775
  22,867
  24,013
  25,216
  26,479
  27,806
  29,198
  30,660
  32,195
  33,807
  35,499
  37,275
Working capital, $m
  103
  108
  113
  119
  125
  132
  138
  145
  152
  160
  168
  177
  186
  195
  205
  215
  226
  237
  249
  261
  275
  288
  303
  318
  334
  351
  368
  386
  406
  426
Total debt, $m
  2,922
  3,171
  3,432
  3,706
  3,994
  4,295
  4,612
  4,944
  5,292
  5,658
  6,042
  6,445
  6,868
  7,312
  7,778
  8,268
  8,781
  9,321
  9,887
  10,481
  11,105
  11,760
  12,448
  13,170
  13,928
  14,724
  15,559
  16,437
  17,358
  18,325
Total liabilities, $m
  4,890
  5,139
  5,400
  5,674
  5,961
  6,263
  6,579
  6,911
  7,260
  7,626
  8,010
  8,413
  8,836
  9,280
  9,746
  10,235
  10,749
  11,288
  11,854
  12,448
  13,072
  13,727
  14,415
  15,137
  15,895
  16,691
  17,527
  18,404
  19,325
  20,292
Total equity, $m
  5,049
  5,306
  5,575
  5,858
  6,155
  6,466
  6,793
  7,136
  7,496
  7,874
  8,270
  8,686
  9,123
  9,581
  10,063
  10,568
  11,098
  11,655
  12,240
  12,853
  13,497
  14,174
  14,884
  15,629
  16,412
  17,234
  18,097
  19,002
  19,954
  20,952
Total liabilities and equity, $m
  9,939
  10,445
  10,975
  11,532
  12,116
  12,729
  13,372
  14,047
  14,756
  15,500
  16,280
  17,099
  17,959
  18,861
  19,809
  20,803
  21,847
  22,943
  24,094
  25,301
  26,569
  27,901
  29,299
  30,766
  32,307
  33,925
  35,624
  37,406
  39,279
  41,244
Debt-to-equity ratio
  0.580
  0.600
  0.620
  0.630
  0.650
  0.660
  0.680
  0.690
  0.710
  0.720
  0.730
  0.740
  0.750
  0.760
  0.770
  0.780
  0.790
  0.800
  0.810
  0.820
  0.820
  0.830
  0.840
  0.840
  0.850
  0.850
  0.860
  0.860
  0.870
  0.870
Adjusted equity ratio
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508
  0.508

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  651
  688
  727
  768
  812
  857
  905
  955
  1,009
  1,065
  1,124
  1,186
  1,251
  1,320
  1,392
  1,469
  1,549
  1,634
  1,723
  1,816
  1,915
  2,019
  2,128
  2,243
  2,364
  2,491
  2,625
  2,766
  2,914
  3,070
Depreciation, amort., depletion, $m
  364
  382
  402
  422
  443
  466
  489
  514
  540
  567
  596
  626
  657
  690
  725
  761
  799
  839
  882
  926
  972
  1,021
  1,072
  1,126
  1,182
  1,241
  1,303
  1,369
  1,437
  1,509
Funds from operations, $m
  1,015
  1,071
  1,129
  1,190
  1,255
  1,323
  1,394
  1,469
  1,549
  1,632
  1,719
  1,811
  1,908
  2,010
  2,117
  2,230
  2,349
  2,473
  2,604
  2,742
  2,887
  3,040
  3,200
  3,369
  3,546
  3,732
  3,928
  4,134
  4,351
  4,579
Change in working capital, $m
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  18
  19
  20
Cash from operations, $m
  1,010
  1,065
  1,123
  1,185
  1,249
  1,316
  1,388
  1,463
  1,541
  1,624
  1,711
  1,803
  1,899
  2,001
  2,107
  2,220
  2,338
  2,462
  2,592
  2,730
  2,874
  3,026
  3,186
  3,353
  3,530
  3,716
  3,911
  4,116
  4,332
  4,558
Maintenance CAPEX, $m
  -346
  -364
  -382
  -402
  -422
  -443
  -466
  -489
  -514
  -540
  -567
  -596
  -626
  -657
  -690
  -725
  -761
  -799
  -839
  -882
  -926
  -972
  -1,021
  -1,072
  -1,126
  -1,182
  -1,241
  -1,303
  -1,369
  -1,437
New CAPEX, $m
  -435
  -457
  -480
  -503
  -528
  -554
  -581
  -610
  -640
  -672
  -705
  -740
  -777
  -816
  -856
  -899
  -944
  -991
  -1,040
  -1,092
  -1,146
  -1,203
  -1,263
  -1,326
  -1,392
  -1,462
  -1,535
  -1,612
  -1,692
  -1,777
Cash from investing activities, $m
  -781
  -821
  -862
  -905
  -950
  -997
  -1,047
  -1,099
  -1,154
  -1,212
  -1,272
  -1,336
  -1,403
  -1,473
  -1,546
  -1,624
  -1,705
  -1,790
  -1,879
  -1,974
  -2,072
  -2,175
  -2,284
  -2,398
  -2,518
  -2,644
  -2,776
  -2,915
  -3,061
  -3,214
Free cash flow, $m
  229
  244
  262
  280
  299
  319
  341
  363
  387
  412
  439
  467
  497
  528
  561
  596
  633
  672
  713
  756
  802
  850
  901
  955
  1,012
  1,071
  1,134
  1,201
  1,271
  1,345
Issuance/(repayment) of debt, $m
  233
  249
  261
  274
  287
  302
  316
  332
  349
  366
  384
  403
  423
  444
  466
  489
  514
  539
  566
  594
  624
  655
  688
  722
  758
  796
  836
  877
  921
  967
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  233
  249
  261
  274
  287
  302
  316
  332
  349
  366
  384
  403
  423
  444
  466
  489
  514
  539
  566
  594
  624
  655
  688
  722
  758
  796
  836
  877
  921
  967
Total cash flow (excl. dividends), $m
  462
  493
  523
  554
  586
  621
  657
  695
  736
  778
  823
  870
  920
  972
  1,027
  1,085
  1,147
  1,211
  1,279
  1,351
  1,426
  1,505
  1,589
  1,677
  1,770
  1,867
  1,970
  2,078
  2,192
  2,312
Retained Cash Flow (-), $m
  -236
  -257
  -270
  -283
  -297
  -311
  -327
  -343
  -360
  -378
  -396
  -416
  -437
  -458
  -481
  -505
  -530
  -557
  -585
  -614
  -644
  -676
  -710
  -746
  -783
  -822
  -863
  -906
  -951
  -999
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  226
  236
  253
  271
  290
  309
  330
  352
  376
  400
  426
  454
  483
  514
  546
  580
  616
  654
  695
  737
  782
  829
  879
  932
  987
  1,046
  1,107
  1,172
  1,241
  1,313
Discount rate, %
  5.50
  5.78
  6.06
  6.37
  6.69
  7.02
  7.37
  7.74
  8.13
  8.53
  8.96
  9.41
  9.88
  10.37
  10.89
  11.43
  12.01
  12.61
  13.24
  13.90
  14.59
  15.32
  16.09
  16.89
  17.74
  18.62
  19.56
  20.53
  21.56
  22.64
PV of cash for distribution, $m
  214
  211
  212
  212
  210
  206
  201
  194
  186
  177
  166
  154
  142
  129
  116
  103
  90
  77
  65
  55
  45
  36
  28
  22
  17
  12
  9
  6
  4
  3
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Kansas City Southern (KCS) is a holding company. The Company has domestic and international rail operations in North America that are focused on the north/south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico. The Company's subsidiaries include The Kansas City Southern Railway Company (KCSR) and Kansas City Southern de Mexico, S.A. de C.V. (KCSM). KCSR serves a 10-state region in the midwest and southeast regions of the United States and has the north/south rail route between Kansas City, Missouri and various ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas. KCSM operates a corridor of the Mexican railroad system. KCSM's rail lines provide rail access to the United States and Mexico border crossing at Nuevo Laredo, Tamaulipas. KCSM also provides rail access to the Port of Lazaro Cardenas on the Pacific Ocean.

FINANCIAL RATIOS  of  Kansas City Southern (KSU)

Valuation Ratios
P/E Ratio 26.7
Price to Sales 5.5
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 14
Price to Free Cash Flow 39.6
Growth Rates
Sales Growth Rate -3.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -29%
Cap. Spend. - 3 Yr. Gr. Rate -6%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 55.6%
Total Debt to Equity 60.6%
Interest Coverage 9
Management Effectiveness
Return On Assets 6.3%
Ret/ On Assets - 3 Yr. Avg. 6.7%
Return On Total Capital 7.4%
Ret/ On T. Cap. - 3 Yr. Avg. 8%
Return On Equity 11.9%
Return On Equity - 3 Yr. Avg. 12.9%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 65.3%
Gross Margin - 3 Yr. Avg. 63.4%
EBITDA Margin 45.1%
EBITDA Margin - 3 Yr. Avg. 42.8%
Operating Margin 35%
Oper. Margin - 3 Yr. Avg. 33%
Pre-Tax Margin 28.4%
Pre-Tax Margin - 3 Yr. Avg. 28%
Net Profit Margin 20.5%
Net Profit Margin - 3 Yr. Avg. 20%
Effective Tax Rate 27.6%
Eff/ Tax Rate - 3 Yr. Avg. 28.3%
Payout Ratio 29.9%

KSU stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the KSU stock intrinsic value calculation we used $2714 million for the last fiscal year's total revenue generated by Kansas City Southern. The default revenue input number comes from 0001 income statement of Kansas City Southern. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our KSU stock valuation model: a) initial revenue growth rate of 5.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.5%, whose default value for KSU is calculated based on our internal credit rating of Kansas City Southern, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Kansas City Southern.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of KSU stock the variable cost ratio is equal to 50.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $361 million in the base year in the intrinsic value calculation for KSU stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for Kansas City Southern.

Corporate tax rate of 27% is the nominal tax rate for Kansas City Southern. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the KSU stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for KSU are equal to 314.9%.

Life of production assets of 24.7 years is the average useful life of capital assets used in Kansas City Southern operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for KSU is equal to 3.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $4813 million for Kansas City Southern - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 100.961 million for Kansas City Southern is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Kansas City Southern at the current share price and the inputted number of shares is $12.1 billion.

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