Flooding Disruptions, Rerouting Expenses Put A Strain on Kansas City Southern's Margins

BMO Capital sees third quarter earnings of Kansas City Southern KSU below consensus on higher costs related to flooding disruptions and the associated rerouting expenses.

The rail road operator is expected to report its third quarter numbers on October 18.

The brokerage cut its third quarter EPS estimate for Kansas City Southern to $1.18 (consensus is $1.23) from $1.27. BMO projects revenue of $607 million (up from $603 million) in line with its expectations.

Volumes are expected to be down 3.8 percent and the company may record higher incentive compensation of approximately $0.04-0.05/share.

"We expect automotive and Ag volumes to be strong, partially offsetting continued weakness in chemicals, intermodal, energy, and other oil-related markets," analyst Fadi Chamoun wrote in a note.

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Relative to North American peers, the analyst believes Kansas City Southern enjoys an above-average growth outlook as it would benefit from secular growth in "Mexican automotive markets, higher throughput at the Port of Lázaro Cárdenas and developments in the chemical market in the Gulf region."

According to the analyst, these factors would help the company achieve a moderate margin improvement from current levels.

However, Chamoun has a Market Perform rating on shares, with a price target of $98.

"We rate KSU Market Perform, reflecting what we view to be fair valuation in the context of low-double-digit EPS growth, low-double-digit ROIC, and moderate free cash flow," Chamoun added.