Kansas City Southern's Share Price At The Mercy Of NAFTA Battle Headlines

“We were impressed by Kansas City Southern KSU's bravado on its Q4 earnings call as management maintained a business as usual attitude with regard to Mexico, including planned capital spending and optimism on auto growth,” Loop Capital’s Rick Paterson said in a note.

Paterson maintains a Buy rating on the company, with a price target of $98.

Turbulence Ahead

The analyst warned, however, that investors need to be prepared for “turbulence”, since President Donald Trump’s initiatives on Day 1 will “almost certainly” include trade policy, especially the threat to NAFTA.

In fact, Paterson believes “a protectionist administration is about to lock horns with a Congress made up largely of free traders, and KCS' stock price will be one of the main barometers of that battle as it unfolds.”

Q4 Results

Kansas City Southern reported its Q4:2016 mostly according to expectations, apart from an unexpected tax rate.

Volumes were flat, while a 3 percent core price growth drove revenue to within 1 percent of the consensus forecast.

The adjusted operating ratio of 64.5 percent was slightly better than the estimate.

“Technically, FX-adjusted EPS of $1.12 missed consensus by five cents, but the inclusion of a one-time non cash tax reserve of $5.8 million pushed the effective rate to 37.6 percent,” Paterson stated.

Guidance

Kansas City Southern expects core price growth to exceed 3 percent and railroad cost inflation in 2017, which the analyst believes would keep “the price vs. cost inflation mafia at bay.”

The company also guided to comp and benefits expense per worker to rise in the low-single digits in 2017.