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Kansas City Southern Sees Gain From Mexico Auto Factories

Kansas City Southern (KSU), the U.S. railroad that gets almost half of its revenue from Mexico, may see as much as “double digit” sales growth in the unit that ships cars as automakers complete factories in the nation.

Opening days are “just around the corner,” Patrick Ottensmeyer, executive vice president of sales and marketing, said during a conference call today, after the company reported second-quarter adjusted earnings that topped analysts’ estimates. The company says it expects a sales boost this year and in 2014.

Japanese carmakers are building facilities in the Latin American nation, which Kansas City Southern says should boost shipping volume. Auto companies invested about $3.7 billion in Mexico from 2010 and 2012, the Center for Automotive Research said. The Mexican Automobile Industry Association has forecast a 35 percent jump in annual production by 2017.

“The trends for Mexico near shoring continue to be positive,” Ottensmeyer said. “We don’t see any changes for that outlook.”

Nissan, which builds cars in the U.S., later this year plans to open a $2 billion auto-assembly plant in Aguascalientes, Mexico, the company’s third in that country. Honda plans to build a $470 million transmission factory in the nation at the same site as an auto plant opening in 2014.

Kansas City Southern reported profit of 96 cents, compared with an average analyst estimate of 95 cents, according to data compiled by Bloomberg. Per-share earnings excluded the impact of debt retirement costs and the weakening of the peso.

Mexican Peso

The weaker Mexican currency resulted in a 14-cent hedging-related loss during the period, the company said on the call. The peso fell 4.6 percent against the U.S. dollar in the second quarter, according to data compiled by Bloomberg.

“If the peso stays where it is, or strengthens further in the second half, we could see growth rates in the high-single digits, as opposed to the double digits,” Ottensmeyer said.

The company said it has received more than its “fair share” of contracts for shipping cars from Mexican facilities. When the plants begin to roll out vehicles at full capacity, the railroad also aims to win business for auto parts.

Kansas City Southern, the fifth-largest railroad in the U.S., has invested $300 million in track upgrades between central Mexico and Houston and railcars that can handle large auto shipments said William Galligan, vice president of investor relations at the Kansas City, Missouri-based company.

Automotive revenue accounted for 8 percent of total sales, or $47.5 million during the second quarter, a 20 percent increase from a year earlier.

The shares rose 1.2 percent to $118.30 at the close in New York. They have risen 42 percent this year, while the Standard & Poor’s 500 Index has added 19 percent.

To contact the reporter on this story: Jennifer Surane in New York at jsurane1@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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