UBS Ups Kansas City Southern To Buy, Sees 'Clear Drivers' In 2016 And Beyond

In a report published Tuesday, UBS analyst Thomas Wadewitz upgraded the rating on

from Neutral to Buy, with a price target of $102, given that the near term challenges to the company are already reflected in the valuation, while Kansas City Southern's "long term volume growth story is differentiated from the broader rail group." The analyst expects only modest exposure to coal for the company after 2015, as compared to its large US rail peers. The stock offers a compelling one year risk/reward profile. There are "multiple clear drivers" for long-term growth, especially due to "new auto plants in Mexico, large investment in Lazaro Cardenas intermodal port infrastructure (APM), and a long runway for share gain from truck in the cross border intermodal market," analyst Wadewitz stated. In addition, the new plastics production plant in the US Gulf Coast is also expected to be a leverage point for the company in 2017 and beyond. Kansas City Southern faced "unusual" execution issues in 2015, with crew shortage in Mexico leading to a decline in its service in the cross border operations, which in turn was a headwind to intermodal volumes. However, according to the UBS report, "The good news is that there is a clear fix which should support improved volumes and cost in 2016."