BMO Capital Markets has maintained its Market Perform and $98 price target on Kansas City Southern KSU, saying the company has a better volume visibility versus class 1 peers heading into 2017 despite higher costs driving a third-quarter earnings miss.
The company’s third-quarter EPS fell 7 percent to $1.12, about 5 percent below BMO/consensus estimates of $1.18. Revenues were largely in line with BMO expectations, as stronger industrial and bulk revenues offsetting weaker-than-expected autos.
“We sense that company has further operational cost-saving opportunities, which can drive very high 40 percent incremental operating margins. This should support low-double-digit EPS growth in 2017,” analyst Fadi Chamoun wrote in a note.
However, the analyst cut his fourth-quarter EPS estimate to $1.19 from $1.27 and 2017 view to $5.01 from $5.21.
Chamoun cited “more moderate pace of productivity improvements over the coming year and lower revenue/carload in the automotive sector reflecting shorter average length of haul” for the estimate cut.
“We would consider a higher valuation multiple if the growth outlook improves beyond the low-double-digit level we currently expect and/or the margin of safety in valuation improves further,” Chamoun added.
At the time of writing, shares of Kansas City Southern were up 0.58 percent to $93.12.
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