Kansas City Southern Helping Rails Regain Their Mojo

Mark Levin of Seaport Global has begun coverage of Kansas City Southern (NYSE: KSU) with an Accumulate rating and target price of $104 on expected volume growth in the fourth quarter and first half of 2017, while noting that shares are attractive at current levels.

Good Times Ahead

The analyst also said the company could eventually be a takeover candidate due to its unique rail network and upcoming opportunities over the next several years.

“What's notable is that the relative premium at which KSU trades to other Class I rails has compressed meaningfully as investors have gravitated to names with cheaper multiples and/or more potential upside from coal. We think this creates an opportunity to buy the best growth story in the space at a reasonable price,” Levin wrote in a note.

After a miserable 2015, rail stocks have regained their mojo in 2016. On an average, rail stocks rose 20 percent versus a 5 percent gain in the S&P 500. Kansas City Southern has been among the best performers, rising 24 percent.

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Moreover, Levin noted that Kansas City Southern is set to deliver higher margins and free cash flow (FCF), with capex topping out this year and next. The analyst expects the company’s operating ratio to improve by 120 bps in 2017 and another 70 bps in 2018.

Similarly, Levin projects FCF to grow from an estimated $347 million in 2016 to $436 million in 2017 and $531 million in 2018.

Growth Opportunities

The analyst also highlighted various growth opportunities for the company, including “on-boarding of several major auto plants in Mexico, new Gulf Region ethylene and plastics plants, significant expansion at the Port of Lazaro Cardenas in Mexico and cross-border intermodal opportunities.”

“While investors may have concerns about the sustainability of auto production levels, weak intermodal and management's reluctance to provide any forward guidance, we think it’s times like these that create opportunity. KSU, in our view, remains the preeminent growth story in the space,” Levin added.

At the time of writing, shares of Kansas City Southern were up 0.73 percent to $93.26.

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