Citi Met With Kansas City Southern's Management; Here's What Happened

In a report published Tuesday, Citi analysts maintained a Buy rating on

, with a price target of $120, following their meeting with the company's management. "Last week we spent time with Kansas City Southern management and came away believing that our and consensus estimates have set the hurdle appropriately low for the company in the mid-single digit growth range this year," the analysts said. The company indicated that it could generate about 10 percent growth, provided there is stabilization in coal and an uptick in the metals/industrials business. The analysts expressed concern regarding both markets, while acknowledging that "the bar is now low and comps get easier in 2H." In the report Citi noted, "Looking out to 2016, we believe KCS's multiple will be supported by a reacceleration of growth into the mid-teens. Driving this growth is the continued ramp up of its crude by rail business, as new Gulf Coast facilities take more volume (3.5 trains/week YE15 to DD trains/week YE16). In addition, the 3 Mexican auto pl+  ants which have been ramping to ~650k annual units should be operating at close to full run rate capacity all year, with 2 new facilities opening." Moreover, the Maersk concession at Lazaro Cardenas is scheduled to open early next year and could add to local as well as cross border volume. Against the backdrop of easier comps in Grain and coal, the analysts expect carload growth to reaccelerate to about 6 percent and project revenue growth at around 10 percent. This would drive operating leverage for about 15 percent EPS growth. "While volume growth for KCS, and industry wide, has been weaker than expected thus far in 2015, the company noted that pricing is trending very well YTD, up 4-5% across contracts…Capex is still targeted at $700-720m this year, but may fall short by ~$50m in our opinion, as some growth gets cut or pushed out," the report added.