Barclays Turns Positive On Rails, Upgrades CSX And Kansas City Southern

Although Transportation stocks have rallied year-to-date, especially some of the Rails, fundamentals seem to have “finally stabilized,” after almost two years of erosion, Barclays’ Brandon R. Oglenski said in a report. He recommended commodity exposed rails over defensive asset-light stocks.

“As investors seek returns in a seemingly permanent world of low interest rates and meager growth, stable fundamentals, improving margins and relatively cheap valuations should help support transports,” analyst Oglenski wrote, adding that the bleeding in railroad fundamentals seems to have finally stopped.

Although there may not be a huge rally, marginal outperformance in rail stocks may be expected, backed by stabilization in volume “from better grain and coal combined with a likely bottom in energy spending,” Oglenski commented.

Rating Changes

The analyst upgraded the rating on CSX Corporation CSX from Equal-Weight to Overweight, while raising the price target from $30 to $35. The EPS estimates for FY1 and FY2 have been revised upward from $1.72 to $1.74 and from $1.85 to $1.87, respectively.

Oglenski also upgraded the rating on Kansas City Southern KSU from Underweight to Equal-Weight, while raising the price target from $94 to $99. The EPS estimates for FY1 and FY2 have been revised upward from $4.78 to $4.80 and from $5.18 to $5.20, respectively.

While CSX is performing well on the cost control front, Kansas City Southern's valuation premium has declined although management is taking steps to improve the business.

Although CSX’s performance has been under pressure by coal challenges for several years, significant value creation can be expected in the long run due to a much lower coal base and increased management focus on margin opportunity, the analyst mentioned.

“KSU is beginning to deliver lower capital spending, higher margins and most importantly, the stock is now much closer to peer valuation levels, making us incrementally excited for the company's long-term prospects,” Oglenski added.

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