This one stock will reflect the state of US-Mexico relations
If you want to know how the market feels about US-Mexico relations, just watch shares of Kansas City Southern (KSU).
The railroad major, which has a market cap of around $9 billion, has 48% of its revenue directly exposed to Mexico, by far the most among members of the S&P 500.
Shares of the company are down about 7% since the election. Though in 2017 the stock has been flat despite continued headlines suggesting the future of US-Mexico economic relations remains murky at best.
And if we want to take the market’s pricing of the stock here as a signal for how investors view the potential progress of US-Mexico trade relations, Kansas City Southern’s stock endured a sharp one-day drop after Donald Trump’s election win and since then hasn’t done much.
In the fourth quarter, Kansas City Southern reported revenues of $599 million, the same as the prior year quarter. Excluding the impact from the Mexican peso, revenues would’ve increased 3%.
Kansas City Southern CEO Patrick Ottensmeyer said in the company’s earnings statement that it is, “aware of both economic and political uncertainty.”
On the company’s earnings conference call, Ottensmeyer added that, “I believe that any modification in NAFTA can and will be done in a rational way that will likely strengthen North America’s economy and KCS future. Mexico is our neighbor and our third largest trading partner. Our economies in our societies are inextricably connected.”
And while the CEO of any company with exposure to Mexico is likely to tout their belief that the long-standing economic, and ever-lasting geographical, relationship between the countries will keep things amicable, the company’s export volume also likely provides investors with some bullishness about the future.
The border tax adjustment “just a concept” for now
Currently, markets expect that some version of the “border tax adjustment” outlined in the House Republican tax plan first proposed last year will make its way into any final piece of legislation. (Trump, however, has decried this as “too complicated.”) A border tax adjustment would be aimed at threading the needle between a value-added-tax and a tariff, and seek to basically incentivize US companies to produce goods domestically either for exports or consumption.
And on this front, Kansas City Southern could see a positive development given that 60% of their carloads are goods heading from the US to Mexico, which would likely be tax-advantaged under some version of a border tax adjustment.
Kansas City Southern CFO Mike Upchurch said on the company’s conference call that a border tax adjustment is, at this point, “just a concept.”