Kansas City Southern (KSU) stock surged nearly 10% Friday after The Wall Street Journal reported that a consortium of private equity investors was considering a possible bid for the Class 1 railroad operator. According to the Journal, the Blackstone Group Inc. (BX) and Global Infrastructure Partners are exploring a potential buyout that could be worth more than $21 billion. The deal provides a bet on increasing trade between the United States and Mexico, given Kansas City Southern's rail network stretches across both countries.
The company has remained on investors' radar as a possible takeover target after Brookfield Infrastructure Partners L.P. (BIP) and Singapore sovereign-wealth fund GIC acquired Genesee & Wyoming Inc. in an $8.4 billion transaction last year. Kansas City Southern stock has a market capitalization of $16.21 billion, offers a 1.02% dividend yield, and is trading up 12.73% on the year, outpacing the railroads industry average by around 12% as of Aug. 3, 2020.
Looking at the chart, Friday's spike higher to an all-time high occurred on enormous trading volume, suggesting institutional buying interest. Moreover, a recent cross of the 50-day simple moving average (SMA) back above its 200-day SMA – referred to as a golden cross – signals the start of a new uptrend. Swing traders who enter at these levels should consider taking profits by trailing a stop under the current swing low at $152.18 and raising the order under each subsequent higher swing low.
Those who track the group should monitor these two other leading railroad operators that rallied after the Kansas City Southern buyout story broke.
CSX Corporation (CSX)
CSX Corporation (CSX) provides rail-based freight transportation services in the eastern United States. The 42-year-old railroad operator saw its second quarter profit plunge almost 40%, caused by a sharp contraction in economic activity from the pandemic. Automotive freight took the most substantial hit, declining 71% to $35 million in 2020 from $121 million in 2019. CSX, which has worked at improving efficiency, said the combination of fewer employees and reduced crew starts saved $109 million during the quarter. CSX stock is trading flat year to date but has gained 8.11% over the past three months as of Aug. 3, 2020. Investors also receive a 1.48% dividend yield.
CSX shares broke down below a trendline stretching back to the March low in Friday's session before staging an intraday reversal to close above the indicator. The move occurred on the highest volume in over a month, indicating that the bulls' intent of defending the $70 level. Active traders who buy here should consider booking profits at either $76.50 or $80 – both significant resistance areas. Keep downside risk limited with a stop-loss order placed beneath Friday's low at $68.07.
Norfolk Southern Corporation (NSC)
Norfolk Southern Corporation (NSC) engages in rail freight of raw materials, intermediate products, and finished goods in the eastern United States. Although the $49 billion railroad company's bottom line shrank 43% in the second quarter from a year earlier, the reported figure of $1.53 per share came in ahead of analysts' expectations of $1.39 per share. Revenues for the period of $2.1 billion declined 29% year over year on the back of a steep drop in total volumes resulting from the coronavirus crisis. Operating expenses fell 21% to $1.5 billion due to reduced fuel costs, compensation and benefits, and purchased services expenses. As of Aug. 3, 2020, Norfolk Southern stock yields 1.99% and has rebounded nearly 13% since early May.
The railroad operator's share price has oscillated within a broad symmetrical triangle over the past six months to establish vital support and resistance levels. Despite the stock trading below its early June swing high, the on-balance volume (OBV) indicator sits above its June peak, suggesting that the shares may be ready to steam through the triangle's upper trendline. In terms of trade management, think about setting a stop below the 200-day SMA and targeting a move to the 52-week high at $217.69.