There’s no denying the role railroads have had in building this great nation of ours — but believe it or not, railroads remain one of the best plays on the broader economy.

#-ad_banner-#Of course, Warren Buffett knows this. His Berkshire Hathaway (NYSE: BRK-B) owning Burlington Northern, the second-largest railroad in North America. While we all can’t be Buffetts and buy our own railroad, we can own a stake in of one of the best operators in the industry — and on a pullback, no less.

Kansas City Southern (NYSE: KSU) is one of the most underrated rail operators, offering investors a solid entry point after tumbling some 20% this year due to weak earnings and guidance. However, the pullback looks like a great buying opportunity because Kansas City Southern is still one of the best plays in the rail industry given its exposure to cross-border opportunities.

Kansas City Southern remains the only railroad operator with operations in both the U.S. and Mexico, where lower labor and transportation costs contribute to the company’s industry-leading margins. At the heart of Kansas City Southern’s disappointing guidance was the fact that new auto plants in Mexico might not begin production as quickly as expected.

Although there has been a delay in openings, they are coming nonetheless. Nissan opened a plant at the end of 2013, and Honda and Mazda are expected to open plants this year. Kansas City Southern is positioned to benefit on both ends of the production process, as raw materials are shipped into Mexico and finished vehicles are sent back across the U.S. border.

So despite the delays, the long-term growth story is still in place for Kansas City Southern. It has one of the lowest debt-to-equity ratios in the industry at 50%, and its earnings are expected to grow at an annual rate of 17.5% over the next five years, one of the highest rates in the industry.

	Flickr/doug_wertman
	Kansas City Southern remains the only railroad operator with operations in both the U.S. and Mexico, where lower labor and transportation costs contribute to the company’s industry-leading margins.

Kansas City Southern’s other key market is energy. As the U.S. continues on its path toward energy independence, energy companies are focusing anew on investing in the U.S. For instance, a number of propane refineries and facilities are being built along Kansas City Southern’s rail network in the Gulf area.

Notably, Chevron-Phillips (a joint venture between Chevron (NYSE: CVX) and Phillips 66 (NYSE: PSX)) and Dow Chemical (NYSE: DOW) have already voiced plans to increase their production in the Gulf area, which should boost Kansas City Southern’s chemical freight revenues.

Kansas City Southern is also investing to help make its current fleet more efficient, which should help boost its already impressive margins. During the past four years, the company has spent $275 million on upgrades to its equipment and facilities. Toward the end of last year, it announced a deal with SSA Marine for the development of an auto terminal that can handle 750,000 autos a year.

Kansas City Southern is also developing a crude oil terminal in Texas that is expected to be able to handle upward of 2 million barrels a day by year’s end. The beauty of the terminal is that it will likely be a key facility for handling crude from Canada and is in close proximity to key processing markets in the region.

Kansas City Southern has been the growth story of the industry, but it hasn’t been the most shareholder-friendly: Its dividend yield is a modest 1.2%. However, given the company’s recent 30% hike in its quarterly dividend, relatively low payout ratio of 27%, and strong balance sheet, investors should remain confident that Kansas City Southern could become a growth and income story over the next few years.

While greater demand for autos and energy products will boost the company’s top line, the ability to expand margins will help generate even more cash flow for investors over the long-term. Kansas City Southern hit an all-time high of over $125 just a few months ago, and there’s no reason to think it won’t continue setting new highs over the next couple of years.

Risks to Consider: As mentioned, the rail industry is a play on the broader economy, so any setback will likely have a negative impact on Kansas City Southern. Especially, considering its key growth areas, auto and energy, are relying on a continued rebound in the economy.

Action to Take –> Putting Kansas City Southern’s historical price-to-earnings (P/E) multiple of 25 on 2015 earnings per share of $5.40 suggests KSU could be trading at over $135 in just under two years. That’s better than 47% upside.

P.S. My colleague Dave Forest, the Chief Investment Strategist of StreetAuthority’s premium Top 10 Stocks advisory, loves companies that own “Legacy Assets” like railroads. These are assets that last for generations, ensure a huge competitive advantage for their owners — and serve as cash machines for their investors no matter what the market’s doing. To learn more about “Legacy Assets,” click here now.