Hold Kansas City Southern

An update has just come out on Kansas City Southern (KSU), in which senior transportation sector analyst Ann H. Heffron, CFA is restating her Hold rating on the company. We excerpted the following details:

'KSU is expected to post fourth quarter results on February 5. We are continuing our diluted EPS estimates at $1.50 for 2007and $1.80 for 2008. Results should benefit from strong pricing, new business, the addition of new locomotives, and improved margins. KSU posted third quarter EPS of $0.48, a 51% gain over 2006's $0.32, and $0.11 above consensus and a dime over our estimate, largely due to lower-than-expected operating expense growth.

'Results were aided by a strong pricing environment that more than offset a 3% decline in car-loadings. The company pays no common dividend.

The stock is trading at significant P/E premiums to its peer group based on 2007 and 2008 consensus earnings estimates, though at a discount based on price/sales and price/book. We believe the P/E premiums are warranted given the near-term above-average earnings growth we expect as the company integrates Grupo TFM and continues to improve its operating efficiency.

'However, inadequate fuel price hedges, evidence of a slowdown in economic activity, and rising interest rates are likely to curb valuation expansion from current levels. We are maintaining our Hold on Kansas City Southern, but reducing our target price to $36. Our six-month target price of $36 is based on approximately 20X our 2008 EPS estimate of $1.80, providing a PEG ratio (P/E divided by estimated future growth rate) of 1.0X, roughly in-line with the industry median.'

Keep Buying Sara Lee

The following excerpts explain why Zacks senior consumer products analyst Steven Ralston, CFA continues to feel optimistic on the shares of Sara Lee Corporation (SLE), the global packaged goods company, and advises investors to Buy the name:

'The five-year Transformation Plan should benefit Sara Lee in the long term but over the first two years, the project provided little earnings visibility. However, the company is now in the third year of the plan and the brand building process is proving to be successful. The company is focused on the more attractive product lines and the operating margin is beginning to expand.

'Quarterly earnings comparisons in fiscal 2008 are expected to be positive. Hence, the Buy recommendation is maintained. Sara Lee stock traded in a P/E multiple range of 11 to 18 during the five years prior to the current restructuring program. The current trailing 12-month P/E of 20.5 is above the range due to the decline in earnings during the initial phase of Sara Lee's Transformation Plan.

'For food companies experiencing restructuring changes, the Price-to-Sales (P/S) metric is appropriate. During the five years prior to the announcement of the Transformation Plan, Sara Lee stock traded in a P/S multiple range of 0.69 to 1.06. The stock is currently selling at a P/S multiple of 0.93 times trailing 12-month sales. The target price of $19.25 is based on a 1.06 P/S valuation on estimated fiscal 2008 year-end sales.'

Magna Cheap for a Big Player

Zacks senior auto industry analyst Paul Raman, CFA continues to reiterate his Buy rating on the shares of automobile parts manufacturer Magna International, Inc. (MGA):

'Magna enjoys a strong competitive position in the automotive industry as it is one of the few providers of a complete range of interior and exterior auto systems to global auto companies. The company also has a strong balance sheet and a cash reserve. The company has a complete product line and has been enjoying increasing content per vehicle. The company has strong relationships with OEMs and has an excellent balance sheet.

'However, we should see earnings that are in-line or slightly below still aggressive expectations. Management also revised their earnings guidance for the full year 2007.