Does Kansas City Southern’s (NYSE:KSU) July Stock Price Reflect Its Future Growth?

Growth expectations for Kansas City Southern (NYSE:KSU) are high, but many investors are starting to ask whether its last close at $124.46 can still be rationalized by the future potential. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

View our latest analysis for Kansas City Southern

Where’s the growth?

Kansas City Southern is poised for significantly high earnings growth in the near future. Expectations from 15 analysts are extremely positive with earnings forecasted to rise significantly from today’s level of $5.614 to $8.886 over the next three years. This results in an annual growth rate of 16%, on average, which signals a market-beating outlook in the upcoming years.

Is KSU’s share price justified by its earnings growth?

KSU is trading at price-to-earnings (PE) ratio of 22.17x, which suggests that Kansas City Southern is overvalued based on current earnings compared to the Transportation industry average of 17.19x , and overvalued compared to the US market average ratio of 17.96x .

NYSE:KSU Price Estimation Relative to Market, July 29th 2019
NYSE:KSU Price Estimation Relative to Market, July 29th 2019

We already know that KSU appears to be overvalued when compared to its industry average. However, to be able to properly assess the value of a high-growth stock such as Kansas City Southern, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 22.17x and expected year-on-year earnings growth of 16% give Kansas City Southern a higher PEG ratio of 1.38x. So, when we include the growth factor in our analysis, Kansas City Southern appears slightly overvalued , based on its fundamentals.

What this means for you:

KSU’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are KSU’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has KSU been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of KSU’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.