psu team report 2013 draft

CFA Institute Research Challengehosted by

CFA Society Kansas CityPittsburg State University

CFA Institute Research Challenge Dec. 19th, 2013

BUY recommendation: We issued a BUY recommendation for Kansas City Southern (KCS) with a target price of $123.56. With a current price of $116.31 we are expecting to see a growth of 8-9%. We determined this value by (1) Discounted Free Cash Flows to Equity, (2) Relative Valuation, and (3) Residual Income.

Favorable Pricing Power: With only one main competitor in Mexico, the merger of Ferromex and Ferrosur under Grupo Mexico, Kansas City Southern is able to hold high pricing power and still attract new customers consistently. This power will continue until new competition enters the industrial railroad market in Mexico.

High Growth Volumes: KCS’s revenue by segments is seeing strong growth in the automobile, intermodal, and industrial and consumer products areas. Intermodal is expected to continue to see high growth up to the year 2020. Total revenues will see the same growth proportionally.

Current Price: (12/13/13) $116.31 Price Target: $123.56

Recommendation: BUY % Increase (Decrease): 5.2%

Highlights

Ivory Investment Corp. NYSE: KSU

CFA institute Research Challenge Kansas City SouthernStudent Research Dec. 19, 2013

Earnings/Share

Q1 Q2 Q3 Q4 YearP/E Ratio

2012A $0.68

$1.10

$0.82

$0.84

$3.43 $33.90

2013A/E 0.94 0.14 1.08 1.23 3.39 $34.312014 1.28 1.38 1.52 1.55 5.73 $20.302015 1.54 1.64 1.74 1.88 6.80 $17.10Key Statistics (Dec. 19, 2013)

Industry: RailroadsSector: IndustrialFinancial StrengthRevenue $2.395BAfter Tax Income $373MReturn on Assets 6.73%Return on Equity 9.61%Debt/Equity 0.97Current Ratio 1.23Market OverviewCurrent Price $117.4452 Week Price Range $76.0-125.9Market Capitalization $13.38BShares Outstanding 110.21MValuation/RiskPrice/Book 4.0Held by Institutions 89.5%Held by Insiders 1.23%Beta 1.38


Kansas City Southern (NYSE: KSU) is a transportation holding company founded in 1887 with three primary subsidiaries: The Kansas City Southern Railway Company (KCSR), Kansas City Southern de Mexico (KCSM) and a 50 percent interest in Panama Canal Railway Company (PCRC). Kansas City Southern comprises approximately 6300 route miles that link commercial and industrial markets in the United States and Mexico. The Franchise of Kansas City Southern connects the fastest growing region of the United States with the rapid growth of Mexico’s industrial market. Along with the strong cross border connection with Mexico, Kansas City Southern subsidiary KCSR has the shortest rail routes between Kansas City and several ports adjacent to the Gulf of Mexico in Louisiana, Mississippi, and Texas. KCSR is the smallest class I railroad company in the U.S, serving a ten-state region in the Midwest and southeast regions and has the shortest north/south rail route between Kansas City and several key ports along the Gulf of Mexico. KCSM operates a key commercial corridor of the Mexican railroad system, has the shortest rail passageway between Mexico City and Laredo, Texas and serves major three Mexican seaports.

Industrial & Consumer Products

24%

Chemical & Petroleum18%

Agriculture & Minerals18%

Intermodal14%

Energy14%

Automotive8%

Other4%

Figure 2: 2012 Revenues Mix

Nov 1, 2013

Aug 1, 2013

May 1, 2013

Feb 1, 2013

Nov 1, 2012

Aug 1, 2012

May 1, 2012

Feb 1, 2012

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Feb 2, 2009

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Aug 1, 2008

May 30, 2008

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Figure 1: KSU Stock Prices (2008-2013)

Investor Contact W.H. Galligan (816-983-1551)

CEO & PresidentD.L. Starling

ChairmanM.R. Haverty

Chief Financial OfficerM.W. Upchurch

Chief Operations OfficerD.R. Ebbrecht

Employees6,110

Websitehttp://www.kcsouthern.com

Telephone816-983-1303

Key Officers

Segment Overview

Business Description

CFA Institute Research Challenge Dec. 19th, 2013Chemical and Petroleum: Included in this sector are products such as plastics,

petroleum refined products, and miscellaneous chemicals. These products are transported by KCS throughout the market of the Midwest, Southeast, and Northeast of the United States. KCS also transports some in Mexico by interchanges in other rail carriers. KCs is currently expanding their customer base as petroleum refineries increase refining capacity. There is coordination with KCS to provide long-term storage opportunities complementing fluid freight operations.

Industrial and Consumer Products: This sector provides metals and ores such as steel, iron, zinc, and copper. Metals produced within Mexico regularly stay within the Mexican Border. The pricing power of steel generally fluctuates depending on global market prices. The higher end steel and metals produced are used by manufacturers of automobiles, household appliances, the oil and gas industry, and other goods developed in the United States. In addition, this sector also serves the paper mills through various short-line connections. KCS is uniquely positioned to serve many important paper mills in the southeast United States whose products are increasing in demand due to a general growth of consumer goods and industrial production in central Mexico.

Agriculture and Minerals: KCS focuses on grain and food products in this sector. Demand for shipping for grain and food is affected by the surrounding competition along with international market price fluctuations of key commodities. In the United States, KCS delivers and receives grain for feed mills of poultry throughout the Midwest and Southeast. In regards to the shipments to Mexico, KCS delivers corn, soybeans, and wheat via Laredo and the Gulf of Mexico. In the long-term outlook, the agriculture and minerals are expected to increase the reliance of imports and exports to Mexico. KCS is well positioned to provide the rail carries throughout Mexico with the increase in demand. Other shipments consist of a variety of products such as ores, minerals, clays, and glass used across the United States.

Energy: Inside the energy sector of KCS are items such as coal, frac sand, petroleum coke, and crude oil. KCS hauls single unit trains for nine electric generating plants throughout the Unites States. Coal originated in the United States is transported to industrial consumers such as paper mills, steel mills, and cement companies. KCS transports petroleum coke from refineries in the United States to cement companies in Mexico as well as to vessels for international distribution through the Pabtex export terminal located in Port Arthur, Texas. Frac sand originating primarily in Wisconsin, Illinois or Iowa is delivered to transloads located in northeast Texas, northern Louisiana, and south Texas for distribution to gas and oil wells in the region. Crude oil originating in Canada, North Dakota, Colorado, and west Texas is delivered to U.S. Gulf Coast refineries and tank farms in Texas and Louisiana.

Intermodal: Intermodal consists of hauling freight containers and truck trailers servicing these customers with long distance shipping. KCS is involved with the United States and Mexico markets, along with cross traffic between the two countries. With KCS’s increase in the foreign direct investment in Mexico has made them an important tool for NAFTA freight flow. The Meridian Speedway also allows KCS to provide premium service in the Dallas area. Long term, the intermodal segment will have full capacity abnormal growths near 2020.

Automotive: Transporting for all aspects of the automobile industry, KCS provides for auto manufacturers, assembly plants, and distribution centers throughout the United States. Some auto manufacturers have moved to Mexico taking advantage of the low cost operations, which gives KCS the chance to take nearly all of the market due to no large competitors. KCS is positioned to be ready for any increase in distribution and demand, specifically with the new plants opening in Mexico in the next year.

Segment Overview (Cont.)


Railroad industry has very high barriers to entry due to high costs of securing the land and building new railroad tracks. Class I railroad who own nearly 70% of the total track miles in US monopolizes industry. Surface Transportation Board defines a class I railroad as “having annual carrier operating revenues of $250 million or more”. Railroad industry is a vital part of a broad economy. North American railroads are operating in a highly competitive environment not only between each other, but also with truckers, barge operators, and air transporters. Rails haul approximately 15% of freight in United States, while nearly trucks move 70%. Rails are often a priority, when moving bulk freight to different parts of the country, while trucks are more preferred when speed, small distance and urgency take place. Mostly this is due to lower fuel expenses using rails. Train can ship 1 ton of cargo for 400 miles on 1 gallon of diesel, while truck needs 3.2 gallons. With increasing oil prices, railroads become more attractive.

Not surprisingly, railroad industry is dependent on the overall economy. With growing economic levels, companies produce more to meet increasing demand levels using railroads to move raw materials and final products. Opposite happens when economy goes down.

Kansas City Southern’s United States daily activities are subject to federal, state and local laws and regulations that are applied industry wide. Rail activities are also regulated by the Surface Transportation Board (“STB”) of the U.S. Department of Transportation (“DOT”), the Federal Railroad Administration (“FRA”) of the DOT, the Occupational Safety and Health Administration (“OSHA”), and other federal and state regulatory agencies. In 2008, the President of the United States signed the Rail Safety Improvement Act of 2008 into law, which changes the hours of service for train and certain other employees and mandates implementation of positive train control at certain locations by the end of 2015.

Positive train control is a technology designed to help prevent train-to-train collisions, over speed derailments, incursions into rail work zones, and entry into main line track if a switch is misaligned at certain locations, including main line track where toxic inhalation hazard or poison inhalation hazard movements occur or where passenger operations occur. In addition, the Rail Safety Improvement Act of 2008 addresses safety at rail crossings, increases the number of safety related employees of the Federal Railroad Administration, and increases fines that may be levied against railroads for safety violations. State agencies regulate some aspects of rail operations with respect to health and safety in areas not otherwise regulated by federal law.

Kansas City Southern’s Mexican operations are overseen by the Mexican Secretaría de Comunicaciones y Transportes (“Secretary of Communications and Transportation” or “SCT”).

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Figure 3 :Industry Track Miles

UPBNSFCSXTCNNSCPKSUFXE

Industry Analysis

Regulatory Environment

CFA Institute Research Challenge Dec. 19th, 2013The SCT establishes regulations concerning railway safety and operations, and is responsible for resolving disputes between railways and between railways and customers. In addition, KCSM must register its maximum rates with the SCT and make regular reports to the SCT on investment and traffic volumes. See Note 1 to the Consolidated Financial Statements in Item 8 of this Form 10-K “Description of the Business — The KCSM Concession.”

The Mexican operation activities fall under the federal and state laws relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings and impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.

Noncompliance with legal and regulatory provisions may result in the imposition of fines, temporary or permanent shutdown of operations, criminal prosecution or, with respect to KCSM, the revocation of business operations.

Port of Lazaro Cardenas Upgrades and Expansion: The estimated growth of the Port of Lazaro Cardenas will allow for a total of 750,000 automobiles handled annually to be shipped either via rail or sea vessel to the final destination. With little state, federal, and local regulations, there will be very little fees and few issues to inhibit the forecasted growth. The local government’s pro-business stance has allowed for a growing productive workforce that is capable of efficiently and economically driving the ports operations. This port in particular is also a natural deep water port that does not require additional construction to enable larger vessels to enter into it. KCS also currently has been awarded ample land for future expansions as continued growth will require.

Expansion of Automotive Plants in Mexico: Kansas City Southern Mexico (KCSM) is looking forward to the addition of four new automobile plants in addition to the nine current plants that they currently have access to. Honda is opening a plant in Celaya, Mexico that plans to open its doors in February 2014 with an annual estimated production of 280,000 units. Mazda plans on opening its doors in the first quarter of 2014 in Salamanca, Mexico with an annual production of 185,000 units. Nissan will begin production at their new Aguascalientes, Mexico plant in December of 2013 producing an estimated 149,000 units. Finally, Audi intends to build a plant in San Jose Chiapa, Mexico, breaking ground in May of 2016, and adding an additional 150,000 units. KCSM will have a 30-40% share of those units to transport to North America and to be processed through the intermodal ports.

Intermodal Growth Prospects in Mexico and United States: With the increase in automobile production in Mexico, there will also be an increase in those production materials that are required. Materials such as petrol chemical, paint, glass, copper, aluminum, and steel will also be needed as well as many other products that are incorporated in the automobile production universe. Rail transportation is approximately 20% cheaper than trucks, and able to more efficiently move massive quantities of products. As the product moves from the origination point to the final destination point, the modes of transportation will change. With an increase in production of automobiles we should also see an increase in accompanying products.

The new technology of “Fracking” has also increased the demand for fracking materials such as frac-sand. The largest deposits of frac-sand originate from states such as Wisconsin, and are being shipped to the Bakken region of North Dakota and into the southernmost boarders of Texas. Future government decisions in Mexico could also allow foreign companies to search out new oil rich fields and begin producing larger quantities of oil to be refined

Investment Summary


Revenues: Kansas City Southern’s revenue for the 2013 year has grown in all segments, but at high percentages in the categories of automobile, intermodal, and industrial and consumer products. There is an expected 7% growth in overall revenue from 2012 to 2013. In 2013, the industrial and consumer segment has seen a noticeable 14% growth from $584.3 million in 2012 to $665 million in 2013. Additionally, the automotive segment has seen an impressive 32% growth and 29% in the intermodal segment.

Based on conversations with management and considering shipping trends, we believe that the intermodal segment has not yet reached the full potential. The full effect of expansion will be seen around 2019 or 2020. Therefore the intermodal segment will continue to see abnormal growth. With automotive growth based on additional plant developments in Mexico , we forecast that revenue growth will peak in 2015 before tapering backwards down to 12% in 2019. With such large increases in expected revenues, there should be proportional increases seen in the expenses. Although there were regular increases in expenses between 7-9% varying from year to year during the 2013-2019 period, net income continued to increase abnormally.

Balance Sheet: With around an 8% increase in total assets from 2012 to 2013, Kansas City Southern has a quick ratio of 0.93 allowing for a sound short-term obligation issues. In the future current assets will see large growth while current liabilities are expected to grow at a slower rate. Every quarter and year end total liabilities is around 50% of total assets also proving Kansas City Southern can handle any long term obligations.

The property, plant, and equipment is one of the accounts expected to increase at a higher growth rate then other assets comparably. With the switch from leasing to ownership of many locomotives, the PPE account will be affected accordingly. PPE has a growth of 9% with $5,684.8 million in 2012 and $6,220.47 million in 2013. Moving forward expect Kansas City Southern see high volumes of PPE and low debt ratios.

When asked about potential cash dividends the company is not expecting to see any abnormal increases in these within the next decade. An additional $0.01 per share increase is the only expected change. With no changes in dividend growth, the large increases in net income will be moved into either retained earnings to be used to pay off existing debt. Although there are a couple long-term bonds

Financial Analysis

Chemical a

nd Petroleum

Industrial a

nd Consumer P

roducts_x0

00d_

Agricultu

re and Minerals

Energy

Intermodal

AutomotiveOther

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Figure 4: Segment Revenue (in mil-lions)

201220132014

Figure 5: Financial Position OverviewQuick Ratio 0.93

Total PPE $6220.47B

PPE per share $0.06

Total Debt $1931.11M

Debt/Equity 0.97

CFA Institute Research Challenge Dec. 19th, 2013expiring in the next two quarters, the amounts to be repaid will be minimum since they have been reduced over time from other retained earnings.

Earnings: Kansas City Southern’s earning per share (EPS) has slightly decreased during the last two years. Based on our forecasted EPS for the fourth quarter of 2013, the company’s EPS

in 2013 will decrease 1.06% compared with the EPS of 2012. However, since several auto factories will open in Mexico in 2014, the EPS for Kansas City Southern is expected to increase dramatically at the growth rate of 75.85% in 2014 and gradually decreases to 12.24% the last few years till the year of 2019. This growth is caused from revenues growing faster than expenses over the next decade.

According to the CEO of Nissan, Carlos Ghosn, Nissan Motor Co Ltd is planning to build 1 million cars in Mexico by 2016. Along with other new plants planned to open in Mexico in the next few years, it is expected by the Mexican Automobile Industry Association to have a 35% jump in annual production by 2017. This will boost Kansas City Southern’s business as most of the cars made in new plants in Mexico will be shipped by rail to destinations throughout South and North America.

As stated before, earnings increases are due to the large increases in revenue relative to low increase in operating expenses. With the expansion of auto plants in Mexico and low competition, KCS is able to have uncharacteristically high growth rates from 2013 to 2019. One plant will be opening in Q4 2013 and two more will be opening Q1 2014. Although the plants may be open, it will most likely be several months before they are operating at full capacity. This delay is the reason total revenues will have a spike near the end of 2014. Expectations of the increase in the intermodal segment also gives an added bonus to the estimated future revenues.

Overview: We valued Kansas City Southern with 2 methods: Discounted Free Cash Flows to Equity, and Relative valuation with historical figures. The range given between these two methods is from a low $114.87 to a high of $126.56. While taking in consideration the aspects of opportunity of KCS including their large growth revenue estimates for each segment, pricing power control in Mexico, and an optimistic future overall, we have placed our 12-month price target to be at $123.56. We derived this value from a weighted average of the three price targets calculated with our models. With that said, we find KCS to be undervalued and support a BUY recommendation.

DCFE: Discounted Free Cash Flow to Equity (FCFE) was calculated using the H Model and Non-Constant Growth Model. The H Model does a great job of recognizing KCS’s expected large growth over the next few years while capturing its eventual decline. Using the factors

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Figure 6: Net Income, Expenses (in millions)

Net incomeTotal operating expenses

Financial Analysis (Cont.)

Valuation

Figure 7: FCFE Factors

Discount Rate 8.1%

Initial Growth Rate 11.88%

Long-Term Growth Rate 4%

CFA Institute Research Challenge Dec. 19th, 2013listed in Figure 7, with an expected initial growth period of six years, the H Model produces a price of $126.56 per share. This is 7.77% higher than its current price of $117.44 and supports the BUY decision. The Non-Constant Growth Model allows us to place the expected growth more directly on its time horizon. When using this model, the price per share is $114.87.

Revaltive valuation: The Relative Valuation Method tends to disagree with BUY decision, but should not be a heavy factor in choosing to SELL/BUY. Since the Relative Valuation is based off of historical numbers, it fails to capture the large growth Kansas City Southern is entering in its automobile and intermodal sections. It contains data from the time period when KCS was recovering from the impact of the Financial Crisis, as a result the price per share projected is much lower than its current price of $117.44. We were not able to accurately use a peer group to use as our relative prices, therefore we had to stay with the historical results. The peer group used would only consist of the merger between ferromex and ferrosur, however there is a foreign exchange difference, and other large railroad controllers in the United States such as BNSF and Union Pacific. These other competitors are much large caps than KCS. This will offset data and would not accurately represent a price target. Additionally, it is expected that including 2007 through 2009 in our historical data will also create an offset due to the extremely low values during the Financial Crisis. While this is somewhat true, and we do try to stray away from those years in all valuations, the offset will still be less than the offset of using BNSF, Union Pacific, or any other large cap competitors. These offsets also are proved correct since the price target created by the relative valuation is at the lower end of our price range.

Valuation

Figure 8: Relative ValuationMultiple Average X (2007-2012) Current Value Price

P/E 22.87 $ 3.36 $ 76.92P/S 2.25 $ 21.74 $ 48.82

P/CF 11.02 $ 5.39 $ 59.39P/B 1.83 $ 32.00 $ 58.56

Target Price CalculationMethod Weight (%) Calculated Price Amount of Target

Relative Valuation (H Model) 20% $117.44 $23.48

Relative Valuation (non-constant

growth)10% $114.87 $11.49

DCFE 70% $126.56 $88.59Target Price of $123.56


KCSM’s Mexican Concession

One of KCSM’s risks with the largest potential impact is the loss of access to Mexico. Right now they are operating under a Concession from the Mexican government granted in 1997. The Concession is renewable up to fifty years, but has many conditions. The Secretariat of Communications and Transportation is in charge of monitoring these conditions; they review KCSM’s compliance to standards laid out by the Concession and make any necessary amendments to the Concession every five years. Should the Concession be revoked, the Mexican government retains ownership of all land and tracks, and KCSM retains ownership of all locomotives and railcars.

Conflicts in Agreements with Other Railroads

KCS operations and plans for future growth are heavily dependent on strong relationships with other railroads and third parties. This includes, but is not limited to, interchange, trackage rights, haulage rights, and marketing agreements. Loss of these rights could limit KCS ability to function properly and move freight around the country as needed, leading to an negative impact on their consolidated financial statements.

Debt

KCS has recently regained their status as an investment grade debt issuer. This has allowed them to advantageously refinance their outstanding debt and line up access to debt for the future. Should access to debt instruments become unavailable, KCS may have a difficult time maintaining liquidity and access to cash to make payments. This could result in the need for extensions from lenders, the possibility of refinancing outstanding debt, postponing capital expenditures, selling off assets, or looking to the market for help by issuing additional securities. All of these actions could adversely impact KCS’s financial statements.

Regulation

KCS is subject to all acts of Congress and state legislatures in addition to regulation by international, federal, state, and local regulatory agencies. Failure to comply with all applicable laws could result in interruption of service to customers and legal fees, both of which would negatively impact KCS’s financial statements. KCS must be actively aware of any changes in legislature or regulation to avoid being impacted by this risk.

Investment Risks

APPENDIX

In Millions, except Share data in Thousands, unless otherwise specified

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2016 2017 2018 2019

Revenues:Chemical and Petroleum 96.9 106.9 103.7 92.4 101.9 98 106.4 104 102.4 109 109.5 110 111.4 117.3 119.6 120.1 120.3 121.7 122 124.3 508 524 550 575Industrial and Consumer Products 118.5 125 136.8 123.3 138.6 137.2 138 137.3 144.2 142.1 148 150 164 162 166 173 171 173 174 177 752.0 803.3 854.5 905.8Agriculture and Minerals 105.1 121.5 108.1 112.7 111.9 106 90.7 91.9 81 86.7 97.1 107.5 95.2 96.1 99.0 103.9 97.0 98.0 100.9 106.0 485 505 530 545Energy 64.6 68 74.4 75 71 67.9 89.3 84.6 76.3 85.3 94.6 89.0 91.4 98.7 108.5 103.1 92.6 100.0 107.0 101.6 396.1 415.4 434.7 454.0Intermodal 54.2 62 65.7 69.9 68.1 76.4 82 80 79.8 86.6 95.8 106 108 115 128 125 150 161 172 178 851 1046 1246 1426Automotive 31.1 34.4 36.7 37 37.5 39.6 48.2 49.1 49.1 47.5 51.4 56.3 60.45 64.3 69.45 75.45 72.92 75.84 78.11 106 437.5 507.5 577.5 647.5Other 18.2 17.1 19.1 20 18.5 20.2 22.8 21.5 20 22.1 25.2 23 21 25 26.5 24.5 24 27 30 29.9 120 130 140 150Total Revenue 488.6 534.9 544.5 530.3 $547.50 $545.30 $577.40 $568.40 $552.80 $579.30 $621.60 $641.78 $651.38 $678.39 $717.09 $725.11 $727.80 $756.49 $784.00 $822.78 $3,549.62 $3,931.15 $4,332.68 $4,703.22Operating expenses:Compensation and benefits 100.4 104.4 109.3 109.7 109.3 105.8 108.4 107.0 106.9 110.1 111.4 $113.72 $114.40 $116.30 $119.03 $119.59 $119.78 $121.80 $123.74 $126.47 $524.1 $551.0 $579.3 $605.4 Purchased services 48.1 54.8 50.6 51.3 54.4 60.3 54.6 50.5 52.3 50.9 57.2 54.314 54.302 53.445 53.280 53.677 53.874 54.299 53.885 53.823 53.97 53.99 53.92 53.93Fuel 79.5 92 86.5 88.5 88.3 86.9 89.5 94.9 90.9 93 102.7 103.992 105.469 109.629 115.589 116.824 117.238 121.656 125.893 131.866 551.80 610.55 672.39 729.45Equipment costs 41.4 42.7 41.4 41.6 40.3 41.1 41.9 43.8 41.9 38.6 39.5 39.800 39.083 40.703 43.025 43.507 43.668 45.389 47.040 49.367 212.98 235.87 259.96 282.19Depreciation and amortization 45.7 45.5 47.9 47.1 48.4 48.7 49.8 51.9 53.1 54.7 55.8 56.8 57.7 58.7 59.8 60.9 61.8 62.8 63.9 65.0 -1.4 -1.4 -1.4 -1.4Materials and other 45.7 43.9 52.6 41.7 49 41.7 52.5 46.7 44.8 52.7 53.3 55.020 55.820 58.072 61.300 61.969 62.193 64.586 66.881 70.115 297.533 329.353 362.841 393.743Elimination of deferred statutory profit sharing liability, net

0 0 -25.6 0 0 -43 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total operating expenses 360.8 383.3 362.7 379.9 389.7 341.5 396.7 394.8 389.9 400 419.9 $423.62 $426.80 $436.88 $452.02 $456.46 $458.59 $470.56 $481.31 $496.61 $1,639.0 $1,779.3 $1,927.0 $2,063.3 Operating income (EBIT) 127.8 151.6 181.8 150.4 157.8 203.8 180.7 173.6 162.9 179.3 201.7 $218.16 $224.58 $241.51 $265.06 $268.65 $269.21 $285.93 $302.69 $326.17 $1,910.64 $2,151.81 $2,405.71 $2,639.94 Other IncomeEquity in net earnings of unconsolidated affiliates 3.6 5.3 4.7 4.6 5.8 4.9 4.4 4.2 5.5 3.5 4.8 4.813 4.885 5.088 5.378 5.438 5.458 5.674 5.880 6.171 $26.62 $29.48 $32.50 $35.27 Interest expense -33.1 -32.4 -32.2 -31.4 -27.2 -25.3 -24.1 -23.8 -23.7 -19.2 -18.3 -18.3 -18 -18 -18 -18 -19 -19 -19 -19 0 0 0 0Debt Retirement (Principle only) 0 -10.3 -3.9 -24.5 -12.9 -5.1 0 -2.1 0 -111.4 -2.4 0 0 0 0 0 0 0 0 0 0 0 0 0Foreign exchange gain (loss) -0.1 0.4 -7.2 -2.3 3.9 -3.5 3.7 -1.4 13.5 -22.2 -1.4 0 0 0 0 0 0 0 0 0 0 0 0 0Other income (expense), net 1.7 0 0.6 0.1 0.1 -0.8 -0.1 -0.2 0.3 -0.1 -0.7 0 0 0 0 0 0 0 0 0 0 0 0 0Income before income taxes 99.9 114.6 143.8 96.9 127.5 174 164.6 150.3 158.5 29.9 183.7 $204.67 $211.47 $228.60 $252.44 $256.09 $255.66 $272.60 $289.57 $313.34 $1,937.27 $2,181.29 $2,438.21 $2,675.21 Income tax expense 35.8 42.9 43.7 0.7 52.2 53.1 73.9 57.8 54.3 14.2 63.3 $71.64 $74.01 $80.01 $88.35 $89.63 $89.48 $95.41 $101.35 $109.67 $678.04 $763.45 $853.37 $936.32 Net income 64.1 71.7 100.1 96.2 75.3 120.9 90.7 92.5 104.2 15.7 $120.37 $133.04 $137.45 $148.59 $164.09 $166.46 $166.18 $177.19 $188.22 $203.67 $1,259.22 $1,417.84 $1,584.84 $1,738.89 Less: Net income attributable to noncontrolling interest

0.1 0.9 0.3 0.3 0.3 0.5 0.6 0.7 0.4 0.3 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 2 2 2 2

Net income attributable to Kansas City Southern and subsidiaries

64 70.8 99.8 95.9 75 120.4 90.1 91.8 103.8 15.4 $119.77 $132.54 $136.95 $148.09 $163.59 $165.96 $165.68 $176.69 $187.72 $203.17 $1,257.22 $1,415.84 $1,582.84 $1,736.89

Preferred stock dividends 1.4 0.1 0 0.1 0.1 0 0.1 0.0 0.1 0 0.1 0 0.1 0 0.1 0 0.1 0 0.1 0 0.2 0.2 0.2 0.2Net income available to common stockholders 62.6 70.7 99.8 95.8 $74.90 $120.40 $90 $91.80 $103.70 $15.40 $119.67 $132.54 $136.85 $148.09 $163.49 $165.96 $165.58 $176.69 $187.62 $203.17 $1,257.02 $1,415.64 $1,582.64 $1,736.69 Earnings per share:Basic earnings per share $0.60 $0.65 $0.91 $0.88 $0.68 $1.10 $0.82 $0.84 $0.94 $0.14 $1.08 $1.20 $1.24 $1.34 $1.48 $1.50 $1.50 $1.60 $1.70 $1.84 $11.39 $12.82 $14.34 $15.73Diluted earnings per share $0.57 $0.64 $0.91 $0.87 $0.68 $1.09 $0.82 $0.84 $0.94 $0.14 $1.09 $1.20 $1.24 $1.34 $1.48 $1.50 $1.50 $1.60 $1.70 $1.84 $11.35 $12.78 $14.29 $15.68Average shares outstanding (in thousands):Basic 104,269 109428 109515 109400 109,622 109,689 109,739 109,712 109,907 109,968 110400 110400 110400 110400 110400 110400 110400 110400 110400 110400 110400 110400 110400 110400Potentially dilutive common shares 5482 382 347 350 374 367 388 368 358 355 361 359 358 357 357 356 355 354 354 353 351 350 350 350Diluted shares 109751 109810 109510 109950 109,996 110,056 110,127 110,080 110,265 110,323 110280 110303 110322 110339 110355 110370 110383 110395 110407 110417 110751 110750 110750 110750Cash dividends $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 0.20 $0.22 $0.22 $0.22 $0.22 $0.22 $0.23 $0.23 $0.23 $0.23 0.23 $0.22 $0.22 $0.90 $0.90 $0.90 $0.90


Period ended (In Millions) Q1 Q2 Q3 Q4e Q1e Q2e Q3e Q4e Q1e Q2e Q3e Q4e 2016e 2017e 2018e 2019e31-Mar-13 30-Jun-13 30-Sep-13 31-Dec-13 31-Mar-14 30-Jun-14 30-Sep-14 31-Dec-14 31-Mar-15 30-Jun-15 30-Sep-15 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19

ASSETSCurrent assets:Cash and cash equivalents $ 63.70 $ 30.00 95.90$ 47.40$ 59.25$ 58.14$ 65.17$ 57.49$ 60.01$ 60.20$ 60.72$ 59.61$ 60.14$ 60.17$ 60.16$ 60.02$ Accounts receivable, net $ 202.40 $ 199.60 211.50$ 212.52$ 215.19$ 221.70$ 231.08$ 233.32$ 237.48$ 244.52$ 251.35$ 259.55$ 273.10$ 296.62$ 321.38$ 344.23$ Materials and supplies $ 140.40 $ 139.10 135.40$ 142.01$ 144.37$ 150.12$ 158.41$ 160.39$ 164.06$ 170.28$ 176.31$ 183.55$ 195.52$ 216.30$ 238.17$ 258.35$ Deferred income taxes $ 87.70 $ 89.10 96.70$ 68.38$ 85.47$ 84.91$ 83.86$ 80.65$ 83.72$ 83.29$ 82.88$ 82.64$ 83.13$ 82.99$ 82.91$ 82.92$ Other current assets $ 48.80 $ 85.90 78.20$ 53.23$ 66.53$ 70.96$ 67.23$ 64.49$ 67.30$ 67.50$ 66.63$ 66.48$ 66.98$ 66.90$ 66.75$ 66.77$ Total current assets $ 543.00 $ 543.70 617.70$ 523.53$ 570.80$ 585.83$ 605.75$ 596.34$ 612.58$ 625.79$ 637.89$ 651.83$ 678.86$ 722.97$ 769.36$ 812.29$ Investments $ 56.60 $ 38.00 42.60$ 34.30$ 42.88$ 39.44$ 39.80$ 39.11$ 40.31$ 39.67$ 39.72$ 39.70$ 39.85$ 39.73$ 39.75$ 39.76$ Restricted funds $ 13.10 $ 11.90 10.80$ 8.95$ 11.19$ 10.71$ 10.41$ 11.19$ 10.71$ 10.41$ 10.31$ 10.87$ 10.75$ 10.68$ 10.66$ 10.58$ Property and equipment (including concession assets), net $5,745.70 $6,063.50 6,120.40$ 6,220.47$ 6,321.89$ 6,428.82$ 6,544.06$ 6,660.45$ 6,761.30$ 6,867.48$ 6,978.76$ 7,096.30$ 7,575.76$ 8,125.34$ 8,705.54$ 9,349.08$ Other assets $ 115.10 $ 72.80 89.50$ 69.35$ 86.69$ 79.58$ 81.28$ 79.23$ 81.69$ 80.45$ 80.66$ 80.51$ 80.83$ 80.61$ 80.65$ 80.65$ Total assets $6,473.50 $6,729.90 6,881.00$ 6,856.60$ 7,033.44$ 7,144.38$ 7,281.31$ 7,386.31$ 7,506.59$ 7,623.80$ 7,747.34$ 7,879.21$ 8,386.05$ 8,979.33$ 9,605.96$ 10,292.35$

LIABILITIES AND EQUITYCurrent liabilities:Debt due within one year $ 162.50 $ 48.30 51.80$ 53.43$ 79.01$ 58.14$ 60.59$ 51.18$ 62.23$ 58.03$ 58.01$ 118.05$ 199.56$ 182.35$ 166.65$ 182.85$ Accounts payable and accrued liabilities $ 356.90 $ 356.30 403.00$ 279.05$ 348.81$ 346.79$ 344.41$ 329.77$ 342.45$ 340.85$ 339.37$ 338.11$ 340.19$ 339.63$ 339.33$ 339.32$ Total current liabilities $ 519.40 $ 404.60 454.80$ 466.00$ 427.82$ 404.93$ 405.01$ 380.94$ 404.67$ 398.89$ 397.38$ 456.16$ 539.75$ 521.98$ 505.98$ 522.17$ Long-term debt $1,431.10 $1,765.70 1,728.60$ 1,877.68$ 1,998.96$ 2,111.89$ 2,231.73$ 2,299.70$ 2,455.84$ 2,569.21$ 2,687.50$ 2,365.10$ 2,361.65$ 2,769.59$ 2,594.31$ 3,045.12$ Deferred income taxes $ 909.40 $ 944.30 985.40$ 1,000.00$ 959.78$ 972.37$ 979.39$ 1,040.00$ 987.88$ 994.91$ 1,000.54$ 1,060.00$ 1,075.00$ 1,090.00$ 2,000.00$ 2,010.00$ Other noncurrent liabilities and deferred credits $ 126.50 $ 132.00 129.50$ 97.00$ 121.25$ 119.94$ 116.92$ 121.25$ 119.84$ 119.49$ 119.37$ 209.46$ 318.51$ 365.76$ 343.42$ 398.96$ Total liabilities $2,986.40 $3,246.60 3,298.30$ 3,307.16$ 3,507.81$ 3,609.12$ 3,733.05$ 3,841.89$ 3,968.24$ 4,082.49$ 4,204.80$ 4,090.72$ 4,294.91$ 4,747.33$ 5,443.71$ 5,976.25$ Commitments and contingencies $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

Stockholders’ equity:$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued, 242,170 shares outstanding $ 6.10 $ 6.10 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ 6.10$ $.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 110,200,949 and 110,131,353 shares outstanding at J une 30, 2013 and December 31, 2012, respectively $ 1.10 $ 1.10 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ 1.10$ Paid-in capital $ 930.60 $ 935.20 939.30$ 944.25$ 937.34$ 939.02$ 939.98$ 948.91$ 941.31$ 942.31$ 943.13$ 953.57$ 958.23$ 962.89$ 967.55$ 972.21$ Retained earnings $2,246.60 $2,238.20 2,332.90$ 2,272.57$ 2,272.57$ 2,279.06$ 2,289.27$ 2,281.22$ 2,280.53$ 2,282.52$ 2,283.39$ 2,281.91$ 2,282.09$ 2,282.48$ 2,282.47$ 2,282.24$ Accumulated other comprehensive loss $ (1.80) $ (2.10) (2.10)$ (2.10)$ (2.03)$ (2.08)$ (2.08)$ (2.10)$ (2.07)$ (2.08)$ (2.08)$ (2.10)$ (2.10)$ (2.10)$ (2.10)$ (2.10)$ Total stockholders’ equity $3,182.60 $3,178.50 3,277.30$ 3,221.92$ 3,215.08$ 3,223.20$ 3,234.37$ 3,235.23$ 3,226.97$ 3,229.94$ 3,231.63$ 3,240.58$ 3,245.42$ 3,250.47$ 3,255.12$ 3,259.55$ Noncontrolling interest $ 304.50 $ 304.80 305.40$ 228.68$ 285.84$ 281.18$ 275.27$ 285.84$ 282.04$ 281.08$ 281.06$ 491.75$ 749.54$ 860.57$ 807.97$ 938.50$ Total equity $3,487.10 $3,483.30 3,582.70$ 3,450.59$ 3,500.92$ 3,504.38$ 3,509.65$ 3,521.08$ 3,509.01$ 3,511.03$ 3,512.69$ 3,732.34$ 3,994.96$ 4,111.04$ 4,063.09$ 4,198.05$ Total Liabilities and equity $6,473.50 $6,729.90 6,881.00$ 6,757.76$ 7,008.73$ 7,113.50$ 7,242.69$ 7,362.97$ 7,477.24$ 7,593.52$ 7,717.49$ 7,823.06$ 8,289.86$ 8,858.37$ 9,506.80$ 10,174.30$


KANSAS CITY SOUTHERN 1 2 3 4 5 6 7 8 9 10 11

Fiscal Period: 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Period End Date: 2008-12-31 2009-12-31 2010-12-31 2011-12-31 41,274.00$ 41,639.00$ 42,004.00$ 42,369.00$ 42,735.00$ 43,100.00$ 43,465.00$

Net Income/Starting Line 183.90$ 69.00$ 180.00$ 331.90$ 379.40$ 373.30$ 617.75$ 758.20$ 1,107.65$ 1,263.52$ 1,426.83$ 1,576.83$ Depreciation 170.10$ 182.50$ 184.90$ 186.20$ 198.80$ 222.53$ 244.00$ 256.32$ 265.96$ 275.96$ 286.33$ 297.10$ Deferred Taxes 63.80$ 31.40$ 106.20$ 120.70$ 197.30$ 103.88$ 111.90$ 128.00$ 132.35$ 134.69$ 122.16$ 125.82$ Unusual Items 2.20$ 2.10$ 38.80$ 34.90$ 20.10$ 19.62$ 23.10$ 27.30$ 25.01$ 23.03$ 23.61$ 24.41$ Equity in Net Earnings (Loss) (18.00)$ (7.70)$ (19.70)$ (18.20)$ (19.30)$ (16.58)$ (16.30)$ (18.02)$ (17.68)$ (17.57)$ (17.23)$ (17.36)$ Other Non-Cash Items 19.10$ 19.00$ 40.40$ 63.60$ (41.50)$ 20.12$ 20.32$ 20.59$ 16.63$ 7.23$ 16.98$ 16.35$ Non-Cash Items 3.30$ 13.40$ 59.50$ 80.30$ (40.70)$ 23.16$ 27.13$ 29.88$ 23.95$ 12.68$ 23.36$ 23.40$ Accounts Receivable 76.10$ 23.30$ (20.20)$ (1.50)$ (21.50)$ 11.24$ (1.73)$ (6.74)$ (4.05)$ (4.56)$ (1.17)$ (3.65)$ Inventories (6.00)$ (12.30)$ 6.30$ (7.20)$ (9.30)$ (5.70)$ (5.64)$ (4.31)$ (6.43)$ (6.28)$ (5.67)$ (5.66)$ Other Assets (35.70)$ 8.60$ (4.80)$ (26.80)$ (15.10)$ (14.76)$ (10.57)$ (14.41)$ (16.33)$ (14.23)$ (14.06)$ (13.92)$ Payable/Accrued 11.10$ (19.90)$ 18.50$ (10.60)$ (3.00)$ (0.78)$ (3.16)$ 0.19$ (3.47)$ (2.04)$ (1.85)$ (2.07)$ Other Operating Cash Flow (10.90)$ (3.10)$ (34.10)$ (35.00)$ (12.70)$ (19.16)$ (20.81)$ (24.35)$ (22.41)$ (19.89)$ (21.32)$ (21.76)$ Changes in Working Capital 34.60$ (3.40)$ (34.30)$ (81.10)$ (61.60)$ (29.16)$ (41.91)$ (49.61)$ (52.68)$ (46.99)$ (44.07)$ (47.05)$

Cash from Operating Activities 455.70$ 292.90$ 496.30$ 638.00$ 673.20$ 687.71$ 944.09$ 1,103.04$ 1,448.52$ 1,605.55$ 1,793.90$ 1,952.45$ Capital Expenditures (576.50)$ (349.20)$ (287.30)$ (495.00)$ (540.00)$ (694.90)$ (683.40)$ (692.20)$ (745.42)$ (825.54)$ (866.53)$ (940.64)$ Acquisition of Business -$ -$ (25.00)$ -$ -$ -$ -$ -$ -$ -$ -$ Sale of Fixed Assets 20.90$ 13.90$ 8.30$ 10.00$ 14.70$ 13.56$ 12.09$ 11.73$ 12.42$ 12.90$ 12.54$ 12.34$ Sale/Maturity of Investment (13.20)$ -- -- -- -- -- -- -- -- -- --Purchase of Investments (30.40)$ (22.00)$ (25.20)$ (33.30)$ (35.20)$ (29.22)$ (28.98)$ (30.38)$ (31.42)$ (31.04)$ (30.21)$ (30.41)$ Other Investing Cash Flow 18.50$ 10.90$ 17.70$ 7.90$ 8.60$ 12.72$ 11.56$ 11.70$ 10.50$ 11.02$ 11.50$ 11.25$ Other Investing Cash Flow Items, Total (4.20)$ 2.80$ (24.20)$ (15.40)$ (11.90)$ (10.58)$ (11.86)$ (14.79)$ (12.90)$ (12.41)$ (12.51)$ (12.89)$

Cash from Investing Activities (580.70)$ (346.40)$ (311.50)$ (510.40)$ (551.90)$ (708.42)$ (700.58)$ (713.94)$ (766.83)$ (845.07)$ (885.21)$ (960.35)$ Financing Cash Flow Items (11.30)$ (7.80)$ (63.90)$ (36.40)$ 9.40$ (22.00)$ (24.14)$ (27.41)$ (20.11)$ (16.85)$ (22.10)$ (22.12)$ Total Cash Dividends Paid (15.20)$ (11.00)$ (11.00)$ (3.00)$ (86.10)$ (25.26)$ (27.27)$ (30.53)$ (34.43)$ (40.72)$ (31.64)$ (32.92)$ Issuance (Retirement) of Stock, Net 8.60$ 76.90$ 217.00$ 2.10$ 1.90$ -$ -$ -$ -$ -$ -$ -$ Long Term Debt Issued 580.10$ 202.10$ 480.70$ 550.00$ 329.60$ 428.50$ 398.18$ 437.40$ 428.74$ 404.48$ 419.46$ 417.65$ Long Term Debt Reduction (262.80)$ (319.10)$ (839.70)$ (653.30)$ (375.90)$ (490.16)$ (535.63)$ (578.94)$ (526.79)$ (501.48)$ (526.60)$ (533.89)$ Long Term Debt, Net 317.30$ (117.00)$ (359.00)$ (103.30)$ (46.30)$ (61.66)$ (137.45)$ (141.54)$ (98.05)$ (97.00)$ (107.14)$ (116.24)$ Issuance (Retirement) of Debt, Net 317.30$ (117.00)$ (359.00)$ (103.30)$ (46.30)$ (61.66)$ (137.45)$ (141.54)$ (98.05)$ (97.00)$ (107.14)$ (116.24)$

Cash from Financing Activities 299.40$ (58.90)$ (216.90)$ (140.60)$ (121.10)$ (108.92)$ (188.86)$ (199.48)$ (152.59)$ (154.57)$ (160.88)$ (171.28)$ Foreign Exchange Effects -- -- -- -- -- -- -- -- -- -- -- --Net Change in Cash 174.40$ (112.40)$ (32.10)$ (13.00)$ 0.20$ 178.12$ Net Cash - Beginning Balance 55.50$ 229.90$ 117.50$ 85.40$ 72.40$ 65.55$ Net Cash - Ending Balance 229.90$ 117.50$ 85.40$ 72.40$ 72.60$ 243.67$ 672.40$ 947.83$ 1,636.75$ 1,869.43$ 2,174.64$ 2,397.65$ Cash Interest Paid 136.80$ 174.00$ 153.00$ 125.00$ 97.90$ Cash Taxes Paid 1.50$ 3.50$ 1.60$ 0.90$ 1.90$

Disclosures:Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as a officer or director:The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.Market making:The author(s) does not act as a market maker in the subject company’s securities.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Kansas City. CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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