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Credit Suisse Upgrades Kansas City Southern, Sees Material Earnings Upside

Credit Suisse Upgrades Kansas City Southern, Sees Material Earnings Upside
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Analysts at Credit Suisse turned bullish on Kansas City Southern (NYSE: KSU) Friday based on a positive view of both the near- and mid-term horizons.

Credit Suisse's Allison Landry upgraded Kansas City's rating from Neutral to Outperform with a price target boosted from $90 to $116. The bullish stance follows a meeting with the company's management team, which left the analyst confident in the company's secular growth story (see Landry's track record).

Kansas City's management focused on the strong demand it is seeing within its cross border refined products unit. The company explained that the opportunity to move gasoline, diesel fuel and LPGs from the U.S. into Mexico is significant. In fact, the business started at a base of near zero in early 2017 and has already ramped up to an annualized revenue rate of $60 million in the second quarter.

As such, the stronger than expected growth in the product segment could add an $45 million to the top line in 2018 and $70 million to the top line in 2019 relative to Landry's initial estimates. This alone could add an incremental $0.14 to the company's 2018 earnings per share and $0.24 in 2019.

A Closer Look

Here is a summary of some of the other segments and metrics which the analyst has turned incrementally positive on:

  • Plastics: The $134 million investment the company made with Sasol Chemicals was expected to add $0.17 in EPS accretion but now this estimate could prove to be conservative.
  • Cross-Border Intermodal: A partnership with BNSF on cross-border intermodal moves could result in the company taking share from the highway after years of stagnation.
  • Free Cash Flow: Capital spending on Sasol and PTC will roll off next year and result in a meaningful improvement in free cash flow which could result in increased buybacks.
  • Valuation: Kansas City's stock is still trading at a valuation that is lower than its five-year historic average and merely in-line with the peer group.

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Latest Ratings for KSU

Apr 2018Credit SuisseMaintainsOutperformOutperform
Apr 2018BMO CapitalUpgradesMarket PerformOutperform
Apr 2018BMO CapitalMaintainsMarket PerformMarket Perform

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