Kansas City's Solid Growth Story Boosted By Mexican Tax Credit

Citi raised its 2016 and 2017

for

Kansas City Southern KSU

as well as its price target, basing its actions on the Mexican fuel tax credit. The credit, according to Citi, is likely to help the already solid growth story of the freight rail transportation company.

Pemex, which is the Mexican state-owned petroleum company, is expected to move toward world market pricing by January 1, 2018. Accordingly, Citi sees the highest earnings-per-share benefit in 2016 followed by 2017, while it expects largely neutral impact in 2018.

Citi's Christian Wetherbee pointed to the company becoming "more competitive with Truck in the intermodal markets where truck sets the price." In businesses that are less modally competitive, the firm believes Kansas City Southern could mitigate the impact of lower surcharges through increased pricing.

The brokerage raised its 2016 EPS estimate to $4.85 from $4.57 following the release of in-line core earnings per share for its second quarter. Citi sees $45 million of upside in earnings before interest and taxes. Citi expects revenues for the third and fourth quarters to trend below its target. Accordingly, the firm sees weaker underlying earnings per share. However, the firm expects $60 million of tax credit to offset the weakness.

Assuming only $15 million in incremental EBIT for 2017, the firm raised its 2017 earnings per share estimate to $5.45 from $5.35. However, Citi maintained its 2018 earnings per share estimate at $6. Assuming a valuation of 10 times its higher 2017 earnings per share estimate, Citi raised its price target to $109 from $108.

The rating remains at Buy.

At time of writing, Kansas City Southern was trading at $98.44, up 1.04 percent on the day.

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