Kansas City Southern Still Citi's Top Pick In Rail

Citi Research analysts like Kansas City Southern KSU and picked the stock as the top one in the rail road sector. The brokerage has a Buy rating and $108 price target on shares.

The analysts are confident volume would grow in the rail segment looking at the volume in a number of the end markets of commodities as the sector is in the transition process going into the year 2017. They pointed out the "less bad trends" in the coal, which faced a tremendous pressure, subject to the sustainment of the recent rally in the natural gas until the year 2017.

The brokerage thinks the case appears to be strongest for PRB coal since the prices are at breaks even at or near the existing one with natural gas. The analysts believe grain seems to be positive in the near-term citing early crop indications.

They also expect the integration of a complete storage and less global competition to provide enough opportunities to offer greater exports yields commencing this fall. They see frac sand to gain steadily from increasing prices of oil and gas apart from rig counts.

"We are lowering our 2Q EPS estimate by 4.1% to $1.01 (For Kansas City Southern) as we are adjusting down our yields and increasing our expense assumptions. We are raising our 2017 EPS estimate by 1.9% to $5.35 primarily on better volume and cost expectations. Our $108 price target is based on a 20x multiple of our2017 EPS estimate," the analysts said in a note.

Shares traded 2.5 percent lower at $87.33 on Tuesday.