Bank Of America Upgrades Kansas City Southern To Buy Following Q1 Results

Bank of America Merrill Lynch’s Ken Hoexter mentioned that Kansas City Southern KSU reported its 1Q results with the EPS beating the estimate and the consensus.

Hoexter upgraded the rating on the company from Underperform to Buy, while raising the price objective from $77 to $160.

1Q Performance

“KSU has cut costs, furloughing 12 percent of its TE&Y employees & parking 12 percent of its locomotives to offset near-term volume declines,” Hoexter stated.

Kansas City Southern reported its operating ratio for 1Q16 at 66.6 percent, 110 bps above the estimate and reflecting a 230 bps year-on-year improvement.

Related Link: Buckingham Ups Kansas City Southern Earnings Forecast Because Of This

Although the EPS came in flat year-on-year, it marginally beat the estimate and the consensus. However, revenues declined 7 percent year-on-year and was below the estimate.

In addition, while operating expenses below the estimate, operating income beat the estimate.

Kansas City Southern’s “positive long-term outlook for growth in autos, energy and intermodal is being offset by short-term uncertainty, as competition from trucks pressures intermodal given excess capacity and plant closures slow auto volumes,” Hoexter said.

Stock Performance

“It is the only rail to post volume growth recently, as it begins to rebuild its case for a steady premium valuation gap to its peers,” the analyst noted.

Although Hoexter believes that there could be a pullback in rail stocks in the near term, the analyst expressed confidence that the company would be able to execute over the next 12 months.