Kansas City Southern KSU www.kcsi.com

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Kansas City Southern (KSU)www.kcsi.com

• Group 4 Brad Boeshaar, Michael Mount, Brandon
  Buchanan

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Investment Thesis

• Recommendation Buy
• Performance has improved under some new
  management including a recent large earnings
  surprise
• KSU is undervalued by the price to book and price
  to sales ratios
• KSU is better positioned than its rivals and has
  better growth potential

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Operations Overview

• KSU is a holding company with three major
  railways KCSR, KCSM, PCRC
• Products Shipped Coal, Paper Forest Products,
  Chemical Petroleum Products, Agriculture
  Minerals, and Intermodal (trucking) Automotive

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Future Plans

• Clear, well-defined five year plan
• Many re-signed and some new long term contracts
• 150 new locomotives in 2007 (90 in Mexico 60 in
  US)
• Improvements in efficiency
• Increases in revenue with less added expense
  (decreasing operating ratio)
• Increasing traveling speed for faster turnaround
• Improvement in safety
• 30 decrease in accidents in 2006

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Lazaro Cardenas
Vera Cruz
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Risks

• Secondary risk Recession will hurt companies
  that ship with KSU. Coal is the most important.
• Revocation of operating rights in Mexico or
  increases in tariffs
• Lower shipping from falling sales (Ford)
• Terrorist attack or increased border controls
• Default risk
• Hurricanes and weather
• Higher price of oil
• Devaluation of the Mexican Peso (free floating)

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Stock Position in Portfolio

• We have 500 shares of KSU valued at 1.3 of our
  portfolio
• We returned 11.7 since our purchase on December
  12, 2006

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• KSUs cost of debt will decrease as long-term
  debt matures and their debt rating improves

• KSU has a lower price to book and price to sales
  ratios than comparable companies

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• Stock price decrease in 2000 for
• a few reasons
• The finance division was spun off
• There was a 90.803 dividend

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• The average Mexican import tariff is very low at
  3.7 and free in the United States (NAFTA)
• About half of goods are taken from the port by
  road and the other half by rail. KSU owns the
  rails

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Summary

• KSU has a higher risk/reward than a typical
  railroad company
• Investor caution is causing undervaluation
• Growth potential mainly in Mexico
• No major debt maturities until 2008
• Focus on lowering operating ratio
• Best position to take advantage of changing trade
  patterns