Bank Of America Downgrades Kansas City Southern, Slashes Targets

In a report published Monday, BofA Merrill Lynch analysts downgraded the rating on

from Buy to Neutral, while reducing the price objective from $116 to $97. Kansas City Southern's 2Q volumes are trending below the targeted levels. "As we approach the mid-point of 2Q15, Kansas City Southern's 2Q-to-date carloads are down 7%, well below our 1% growth target. Coal carloads are down 44%, below our 7% decline target," the analysts mentioned. The decline in carloads is attributable to the virtual shutdown of the company's main non-regulated utility customer Luminent. Other factors affecting Kansas City Southern's volumes include the pullback in crude prices, decline in frac sand and metals and major service issues with the company's own network. Kansas City Southern has withdrawn its 2Q15 and 2015 revenue and EPS guidance. "Noting weak volumes, FX impacts, soft energy markets, poor internal service levels (as attrition was too robust at its Mexican network limiting crew availability), weak economic indicators and weak crude spreads, KCS does not anticipate hitting its pre-set goals in the near term," the analysts pointed out. The EPS estimates for 2Q15, 2015 and 2016 have been reduced from $1.28 to $1.05, from $5.00 to $4.50 and from $5.80 to $5.25, respectively. Kansas City Southern's shares have declined 22 percent so far this year. "The long-term growth potential will provide support, but believe this overhang will last through 3Q-4Q, when the Coal and Ag comps should begin to soften," the analysts stated.