The New Boom In TexMex Railroading
by Tom Dyson
July 14, 2006

My encyclopedia calls the container box, “One of the most important contributions to growth of the world economy in the 20th century.”

They say it “paved the way for Asia to become the world's workshop and brought consumers a previously unimaginable variety of low-cost products from around the world.”

Think about it. The container box is a simple, yet brilliant, innovation...

They go everywhere. You can load them onto ships, trains or trucks. When they’re not in use, you can stack them up in neat piles. They’re easy to move around with specialized cranes.

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They are secure, anonymous and private. No one can see what’s inside. Customs guards may not like them, but it’s a great selling point for shippers.

They are easy to load and unload. It’s much harder to load a railroad boxcar or a tractor-trailer. The boxcar has doors on the side and the trailer has an annoying chassis. Container boxes save the shippers time and money.

Right now, there are 20 million of these simple metal boxes moving around the world. They carry 95% of all goods coming into U.S. says MSNBC.

Today, we’re going to profit from the container box.

I found these statistics in this month’s issue of TRAINS magazine: One out of every two loaded containers in America carries goods manufactured in China. And between 2000 and 2006, the number of containers arriving in the U.S. from China doubled.

There are three major West Coast container ports, Long Beach, Los Angeles, and Tacoma/Seattle. There are two smaller ports in Vancouver and Oakland.

The thing is, even though the ports have made big changes in the last few years, there still isn’t enough capacity. It’s a dangerous situation. Any small disruption could back up the container trade for weeks. Remember all those containerships mooring offshore when the L.A. longshoremen went on strike in summer 2004?

It’s not just about getting the boxes into port either. Then they need to be hauled away. Problem is, the railroads are also at full capacity.

To take some pressure off, two new super ports are under construction, one in Prince Rupert, British Columbia and the other at Lazaro Cardenas, on the Pacific coast of Mexico.

I’m interested in the Mexican port for the following reasons:

1. Lazaro Cardenas is the deepest port in Mexico. This is a key competitive advantage. It’s the only port in Mexico that can serve the super-large container ships.

2. Lazaro Cardenas is 600 miles closer to Houston than Los Angeles. It will steal some of the California ports’ Mid-west business.

3. At the moment, California ports serve Mexico too. Lazaro Cardenas will steal a large slice of this business to become Mexico’s most important container port.

4. Any congestion at the other west coast ports will push more traffic to Lazaro Cardenas.

The Port’s marketing manager says they’re already getting requests from leading shipping companies to create additional facilities. And in case you’re worried about banking on the Mexican government to pull this one off, this port is owned by Hutchinson Whampoa, a giant Hong Kong-based port operator who knows how to build these ultra-modern facilities.

Hutchinson Whampoa already has operations in 20 countries, so it doesn’t make sense to invest directly in this massive port operator on the basis of one new port in Mexico. There’s a much better play:

We buy the only railroad that serves the port… Kansas City Southern (KSU).

KC Southern is the smallest of the seven Class I railroads in North America. They call it the “TexMex railroad.” Unlike other railroads, which tend to run east/west, KCS runs north/south - connecting the U.S. heartland with the Gulf of Mexico. They also own the routes from Texas to Lazaro Cardenas.

In an August 2005 report, UBS analyst Rick Patterson thinks Lazaro Cardenas could generate $45 million a year for KCS by 2010, “roughly doubling its current intermodal revenue.”

KC Southern has doubled in the last two years, so it’s not a cheap stock, especially when compared to the other railroads. But if you’re looking for a way to invest in the TexMex railroad boom, this is it…

Good investing,

Tom

Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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