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Full Steam Ahead for Kansas City Southern; Tobacco Stocks Fall on Regulation Fears

By Dan Caplinger - Apr 20, 2021 at 4:30PM

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Markets were sharply lower on Wall Street.

Tuesday was not a good day for stock market investors, as major market benchmarks were broadly lower on the day. Even as COVID-19 vaccination efforts continue in the U.S., nervousness about a huge spike in case counts in India and elsewhere internationally have some market participants questioning the bullish thesis for a full global economic recovery. As of 3:45 p.m. EDT, the Dow Jones Industrial Average (^DJI 0.23%) was down 273 points to 33,805. The S&P 500 (^GSPC 0.36%) dropped 27 points to 4,136, and the Nasdaq Composite (^IXIC 0.00%) gave up 122 points to 13,793.

Even on a down day, Kansas City Southern (KSU) chugged steadily higher on news that a second railroad acquirer might be interested in purchasing the company. Meanwhile, Altria (MO -1.34%), British American Tobacco (BTI -1.30%), and some other tobacco stocks  fell on news of potential regulation that could hurt their businesses.

A Canadian battle royale for Kansas City Southern

Shares of Kansas City Southern soared more than 15% on Tuesday morning. Just when investors had thought that the railroad company's merger with Canadian Pacific (CP 1.42%) might go through as planned, another rival north of the U.S. border stepped in to shake things up.

Train on a track with other railcars nearby.

Image source: Getty Images.

Canadian National Railway (CNI 0.29%) offered what it called a superior bid for Kansas City Southern, trumping Canadian Pacific's $29 billion deal with a $325 per-share bid that would work out to an enterprise value of $33.7 billion. Under the terms of the Canadian National deal, Kansas City Southern shareholders would get $200 in cash plus 1.059 shares of Canadian National common stock. That's a much higher proportion of cash than the Canadian Pacific proposal, and that formed one of the bases on which the rival railroad claimed superiority.

Canadian National stands to get the same strategic advantages as Canadian Pacific from picking up Kansas City Southern. The successful bidder will be able to boast a rail network covering the three biggest economies in North America, connecting Mexico and the U.S. with Canada. It will also stand up more effectively from a competitive standpoint to larger U.S. railroads.

With the stock at around $300 per share, investors clearly hope that Canadian Pacific will up its own offer and create a bidding war. With a 50% move up since the beginning of March, though, shareholders won't be unhappy no matter who wins Kansas City Southern.

Tobacco stocks go up in smoke

Elsewhere, shares of tobacco companies were under pressure. Altria fell almost 4%, while British American Tobacco's stock was down nearly 3%.

After years of consideration, the federal government might be about to move forward on planned new regulation of the tobacco industry. That would potentially include requiring cigarette manufacturers to cut nicotine levels in their products dramatically. In addition, the U.S. Food and Drug Administration might seek to have flavored menthol cigarettes banned entirely, based on commentary from the Centers for Disease Control and Prevention that menthol and other flavorings are designed to make smoking more attractive while doing nothing to prevent harmful health effects.

The news only temporarily hit shares of Philip Morris International (PM -3.14%), whose business focuses outside the U.S. market. The global tobacco company released favorable earnings results that pointed toward the success of its strategy to emphasize alternative tobacco products.

A final decision on new regulation will take time to evolve, and it won't crush Altria or BAT immediately. However, it's yet another factor weighing on an industry that has already been in a secular decline for decades.

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Stocks Mentioned

Kansas City Southern Stock Quote
Kansas City Southern
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,037.68 (0.23%) $69.86
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,845.08 (0.36%) $13.69
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$41.16 (-1.34%) $0.56
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$11,322.24 (0.00%) $0.00
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$95.00 (-3.14%) $-3.08
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
$40.72 (-1.30%) $0.54
Canadian Pacific Railway Stock Quote
Canadian Pacific Railway
$71.65 (1.42%) $1.00
Canadian National Railway Company Stock Quote
Canadian National Railway Company
$113.64 (0.29%) $0.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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