Cowen Upgrades Kansas City After NAFTA 'Wall Of Worry' Removed

President Donald Trump and his Mexican counterparts reached a preliminary trade agreement this week that bodes well for Kansas City Southern KSU as nearly 50 percent of the U.S.-based rail company's business comes from the Mexican market, according to Cowen.

The Analyst

Cowen's Jason Seidl upgraded Kansas City from Market Perform to Outperform with a price target lifted from $124 to $138.

The Thesis

A preliminary trade agreement between the U.S. and Mexico removes a "wall of worry" for Kansas City, given its exposure to Mexico's auto, intermodal and energy sectors, Seidl said in the upgrade note. (See the analyst's track record here.)

Granted, trade talks between the two countries have yet to be confirmed, but there are sufficient "assurances that trade with Mexico is about to be set in stone," the analyst said. 

Kansas City's near-term business in Mexico should improve, which is reassuring for shareholders, as the company's margins south of the U.S. border are historically 4.7-7.5-percent higher, Seidl said. Investors can rewind their watches to "pre-Trump times" and re-rate the stock's valuation from its current forward PE multiple of 17.3 times to the five-year average before the 2016 election of around 21 times forward PE, he said. 

Cowen's revised $138 price target is based on a 20 times multiple on a conservative 2019 EPS estimate of $6.90, which is short of the Street's estimate of $7.03 per share.

Price Action

Kansas City Southern shares were trading up 1.39 percent at $119.96 at the time of publication Wednesday. 

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Photo by Terry Cantrell via Wikimedia.