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- 2013 - January - 14th -

Vistakon parent J&J reportedly interested in Bausch & Lomb

As Vistakon last week was talking about the expansion of its distribution facilities in Deerwood Park, market rumors had parent company Johnson & Johnson considering an even bigger expansion of its contact lens business.

According to news reports, Johnson & Johnson is one of several possible bidders looking to buy Vistakon competitor Bausch & Lomb Inc.

Bausch & Lomb was bought out in 2007 by investment firm Warburg Pincus LLC and a month ago, Warburg began exploring a sale of the Rochester, N.Y.-based vision products company, according to several news reports.

According to a Bloomberg News story last week, Johnson & Johnson is one of several big health care firms that are looking at Bausch & Lomb. Other potential bidders include Merck & Co., Pfizer Inc. and Abbott Laboratories, it said.

Warburg bought Bausch & Lomb for $4.5 billion in 2007 and the firm is seeking to sell it now for at least $10 billion, Bloomberg reported, citing unnamed sources. If it can't find a buyer, Warburg also would consider an initial public offering for Bausch & Lomb, it said.

Officials of Johnson & Johnson, Bausch & Lomb and the other parties involved are not talking so it's difficult to say if New Jersey-based Johnson & Johnson is seriously interested. But it's intriguing to think about what this could mean for its Jacksonville-based Vistakon subsidiary, which already dominates the market with its Acuvue brand contact lenses.

Vistakon, which has about $3 billion in annual sales, controls about 40 percent to 41 percent of the worldwide contact lens market, according to Robert W. Baird medical technology analyst Jeff Johnson.

The next largest company in the market is Ciba Vision, with about 25 percent, followed by CooperVision with 17 percent, Johnson said. Bausch & Lomb trails with about 10 percent, he said.

Put Bausch & Lomb together with Vistakon and the combined company would control half of the market. Johnson & Johnson might have a tough time selling that to the Federal Trade Commission.

However, Bausch & Lomb's operations include more than contact lenses. The company also produces pharmaceutical products and surgical devices for eye care, as well as contact lens care products. That would be appealing to Johnson & Johnson.

"They're probably looking at the pharma and surgical side of the business," Johnson said.

Federal antitrust officials could allow Johnson & Johnson to buy Bausch & Lomb's other businesses and force it to divest the Bausch & Lomb contact lens division. So if a deal actually does take place, it seems unlikely that it would spark even more expansion of Vistakon's contact lens operations in Jacksonville, where it currently employs about 1,800 people.

On the other side, people at Bausch & Lomb's headquarters in upstate New York are nervous about what a sale could mean in Rochester, where it employs about 1,700 people.

When word of a possible sale or IPO leaked out last month, U.S. Sen. Charles Schumer (D-N.Y.) sent a letter to Warburg officials urging them to ensure that the jobs in Rochester are preserved in whatever transaction takes place.

"Regardless of the exact vision for Bausch & Lomb's future ownership, the irreplaceable value of Rochester's top-notch workforce in continuing the company's success is crystal clear," Schumer's letter said.

Bloomberg reported that Warburg is seeking initial bids by the end of this month. Stay tuned.

Two firms downgrade CSX

It looks like the weak coal outlook will continue to weigh on CSX Corp.'s stock in 2013.

CSX was one of few local stocks to fall in price in 2012, largely because of concerns that decreased demand for coal will continue to decrease freight volumes on the Jacksonville-based railroad.

Coal is CSX's biggest business, accounting for more than 30 percent of revenue in previous years.

Last week, two investment firms lowered their ratings on CSX and another eastern U.S. railroad, Norfolk Southern Corp., largely because of coal.

"Persistently weak natural gas prices, exacerbated by another mild winter (to date), continue to give us concerns regarding coal. As such, we have once again lowered our estimates for both Norfolk Southern and CSX," analysts at Raymond James & Associates said in a research report. They lowered their rating on CSX from "outperform" to "market perform."

Goldman Sachs & Co. analysts lowered their rating on CSX from "buy" to "neutral," essentially the same rating as Raymond James, saying they see more attractive opportunities elsewhere in the transportation sector.

"We think the Eastern rails are likely to post the weakest year-over-year earnings growth in the transport space in the first half of 2013 on soft export coal fundamentals and only modest traffic growth ex-coal," the Goldman Sachs analysts said in their report.

As for CSX specifically, "EPS expectations for 2013 have fallen 10 percent since September 1 and we see few catalysts on the near-term horizon that would drive earnings and share outperformance," they said.

Goldman Sachs also lowered its rating on the entire railroad industry from "attractive" to "neutral."

"We like the sector's resiliency throughout the economic cycle, but believe other sectors are better positioned near term," it said.

Landstar upgraded by analyst

While it was bearish on the railroad sector, the Goldman Sachs report on transportation stocks raised the firm's overall rating on the trucking industry from "neutral" to "attractive,"

"The domestic trucking sector is likely to be a major beneficiary of the improvement in a domestic freight recovery, stemming from further gains in U.S. energy production, housing and non-residential construction," it said.

However, the firm maintained a "neutral" rating on the one Jacksonville-based public trucking company, Landstar System Inc. It did not comment specifically on Landstar.

Meanwhile, another analyst raised his rating on Landstar last week. Wells Fargo Securities analyst Anthony Gallo upgraded the company from "market perform" to "outperform."

"We believe the business model is poised to outperform both asset-based and non-asset-based peers," Gallo said in his research note.

Landstar is a non-asset-based trucking company, meaning that it doesn't own its own trucks. It contracts with drivers who own the trucks to haul freight across the country.

"We like Landstar's exposure to the domestic industrial economy where we see ancillary market demand (housing, unconventional energy) keeping upward pressure on flatbed pricing even in a lackluster macro," Gallo said.

"Moreover, we believe the non-asset- based model provides important insulation from productivity and expense drags that we expect the industry to face from pending 2013 regulations," he said.

Gallo said his six-to-10-month valuation range for Landstar's stock is now $59 to $61, up from his previous valuation of $48 to $50. Landstar's stock was trading at $54 last week when he issued his upgrade.

Regency Centers downgraded

Raymond James analysts last week downgraded Jacksonville-based Regency Centers Corp. as part of a general downgrade in real estate investment trusts that specialize in shopping centers.

Regency was lowered from "outperform" to "market perform."

"The shopping center REITs had a strong year in 2012, returning 25 percent, despite minimal increases in earnings estimates," Raymond James said in its report on the industry.

"While small-shop leasing is improving, we expect portfolio recycling, moderating occupancy gains, limited pricing power, and minimal external growth opportunities to limit earnings upside for the sector as we head into 2013," it said.

"With the big boxes close to full, the shopping center REITs (and specifically Regency) will be dependent on gains in small-shop occupancy to drive the bulk of the internal growth in 2013. While small-shop leasing velocity has certainly improved over the past year, we believe most of the low hanging fruit has been picked and gains in shop occupancy will not be a meaningful driver of earnings upside," the report said.

Strong sales sparks increase in Stein Mart forecast

After Stein Mart Inc. reported strong sales for the holiday season, Avondale Partners analyst Mark Montagna increased his earnings estimates for the Jacksonville-based fashion retailer.

"Stein Mart's December comp gain of 5.9 percent continues to build the case that Stein Mart is on the right path with its conversion to everyday low prices from a coupon driven pricing scheme and from a stronger merchandise assortment, especially with the Home category," Montagna said in a research note.

Comp, or comparable-store sales, measure sales at stores open for more than one year. It is considered a key indicator of a retailer's performance.

Montagna said Stein Mart is likely to post its first annual gain in comp sales in seven years in the current fiscal year, which ends at the beginning of February.

Montagna raised his earnings estimate for the current year from 39 cents a share to 42 cents and for fiscal 2013 from 50 cents to 56 cents, but he maintains a "market perform" rating on the stock.

"Investor resistance remains due to the lack of filing the 10-Q for the third quarter," he said.

Stein Mart has delayed filing its 10-Q, its quarterly report sent to the Securities and Exchange Commission, because of accounting errors that need to be corrected.

Kennedy leaves executive post at LPS

Lender Processing Services Inc. said in an SEC filing that Lee Kennedy resigned as an active employee of the Jacksonville-based company but will continue as chairman of the board. He had been serving as executive chairman of LPS since September 2009, but will no longer have an executive role.

Kennedy was previously CEO of Fidelity National Information Services Inc., which spun off LPS as a separate public company in 2008.

mbasch@baileypub.com

(904)356-2466

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