KC Southern Bonds With A Nice Yield

 In Bond Investing, Investing Idea
Kansas City Southern train

http://etrucking.com/

Submitted by Holmes Osborne via Seeking Alpha

Kansas City Southern (NYSE:KSU) has a series of decent yielding bonds with a relatively short-term maturity.

The bonds yield 3.243% and have a coupon of 2.35. They mature 5/15/20 and have the cusip 485161aq6. The original issue was $240 million and is continuously callable.

According to Moody’s, KC Southern has a 50-year concession to use the rails. The concession ends in 2047, but is renewable. In 2027, third parties may use the rails but must pay a fee to KC Southern. Moody’s rates the bonds Baa3. What is interesting is that S&P does not have a rating on this particular issue. Perhaps this is in part why the yield is so nice (and the price so low). It rates other debt from the Mexican division at BBB-.

No doubt, there is fear in the rail business. Total volume fell 13.5% year over year. The company made $9.5 million less hauling frack sand from Q4’14 to Q5’15. Scrap metal was down almost $20 million. Coal was hardly affected. Grain was down $27.2 million.

Fourth quarter revenues fell 7% to $598 million. Revenue numbers were hurt by the weak peso but helped by low fuel costs. Fuel costs fell from $95.1 million to $69.9 million in the fourth quarter 2015 versus 2014. The balance sheet showed $136.6 million in cash and $171.9 million in accounts receivable. The liability side showed $757.6 million in current liabilities and $2.045 billion in long-term debt. Free cash flow was $221.3 million in 2015 and $237.8 million in 2014. Things are a little tight on the balance sheet, but I’m not too worried. KC won’t have a problem rolling maturities into new debt; it’s a well-respected company.

Credit Suisse thinks KSU will earn $4.48 per share in 2016, compared to $4.50 in 2015. Estimates for 2017 are $5.08 and $5.76 for 2018. I’m glad I’m not a Wall Street analyst. I’d hate to try to guess what some company is going to earn several years into the future. It’s literally impossible.

The prospectus didn’t show anything exciting. There is a change of control feature that requires KSU to buy back the bonds at $101. The notes are senior and unsecured, just like most corporate bonds that are available.

We are buying this debt for our clients. A 3.243% yield sure beats 1.4% for comparable Treasuries. KSU is a well run company and the bonds seem extremely safe.

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Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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