Kansas City Southern Alert: Bank Of America, Citi Lower Targets

Kansas City Southern KSU fell sharply on Monday as the company lowered its 2015 revenue outlook by 400 basis points. Analysts at Bank of America Merrill Lynch and Citi Research have lowered their profit and revenue estimates, as well as their price targets. The two firms, however, have reiterated Kansas City Southern as a Buy.

At Bank of America, the analysts argued that the entire rail group faces a "tough" market in 2016, after "outpacing the S&P 500 for 15 consecutive years." While Bank of America put a Buy on Kansas City Southern, the analysts did note that it just barely met the firm's Buy criteria of at least a 10 percent upside to the price target of $118. That price target represents a 23.1x multiple on the 2015 EPS of $5.10 and 19.8x multiple on the 2016 EPS of $6.25.

Citi argued that Kansas City Southern will see price support around a multiple of 20x 2015 EPS, meaning the stock could trade at $100 – just $6 below Monday's closing price. The analysts pointed to support at that multiple back in February 2014 as evidence of the historic trend. Looking forward to the future, a 20x multiple on 2016 EPS will mean that KSU trades at $120. The risk/reward, according to the analysts, is 6 percent downside versus 13 percent upside.

Kansas City Southern dropped 8 percent Monday to close at $106.48.