Market Overview

Kansas City Southern, The Growth Stock

Kansas City Southern, The Growth Stock

Bank of America Merrill Lynch said in a note valuation of Kansas City Southern (NYSE: KSU) looks good for growth potential. The firm upgraded the shares of the company and lifted the price target.

The rating on Kansas City Southern shares now go to Buy from Neutral and the price target from $113 to $116.

Analysts Ken Hoexter and Ariel Rosa noted that Kansas City Southern shares have been hit in recent times by a trend of negative news, including Luminent shutting its largest coal plant on the company's network, the ongoing NAFTA negotiations and the recent hurricane impacts.

The analysts indicated that the company's shares now trade at a 4-percent discount to its historical P/E, which is a large discount relative to peer Class I rails' 25-percent premium valuation over their historical average P/E's.

See also: A Railroad Pair Trade: Kansas City Southern Vs. Union Pacific

"We believe KSU has one of the best growth prospects compared to the other rails (after adjusting for a coal plant shutdown), as Mexican energy reform and manufacturing growth, particularly in autos, support better-than-average growth," the analysts said.

Additionally, BofA Merrill Lynch believes the 18.4 times multiple at which Kansas City Southern stock currently trades is in line with the rail group average but fails to reflect the potential. The firm believes NAFTA negotiations and Mexican regulatory overhangs should abate, as issues move to their natural conclusion over the next few months.

At the same time, the firm believes construction in the hurricane-impacted Gulf Coast will likely boost industrial, auto and chemical volumes, as the region works to rebuild post storms.

Net-net, the firm feels the company's shares deserve to trade at a premium to its peer group, given the growth potential and as estimates are compressed, given a customer plant closure.

To account for hurricane impact, the firm lowered its volume target for the third quarter but expects acceleration in the fourth quarter, catching up on some lost third-quarter volume. The firm also lowered its third quarter, 2017 and 2018 earnings per share estimates by 5 percent, 1 percent and 3 percent, respectively to $1.32, $5.15 and $5.65.

Latest Ratings for KSU

Apr 2019MaintainsStrong BuyStrong Buy
Apr 2019MaintainsBuyBuy
Apr 2019MaintainsEqual-WeightEqual-Weight

View More Analyst Ratings for KSU
View the Latest Analyst Ratings

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