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Wall Street speculates on possible PHH sale

by Mark Basch, Contributing Writer

PHH Corp. made news in Jacksonville recently by cutting a third of its local workforce.

However, the New Jersey-based company is making bigger headlines nationally as Wall Street speculates that the company is up for sale.

PHH operates two separate businesses: mortgage banking and fleet management services. The mortgage banking operation works out of offices at its Mount Laurel, N.J., headquarters and Jacksonville.

Reuters news service last week, citing "three people familiar with the situation," reported that PHH is discussing a plan to split up the two businesses and sell them separately. This follows a call by one large shareholder last month to sell off the fleet management business.

PHH actually tried this once before. It agreed on a deal in 2007 in which it would sell the whole company to General Electric Co., and General Electric in turn would sell off the mortgage business to The Blackstone Group. However, the deal fell apart when the financial crisis hit, leaving Blackstone unable to get financing.

Last Monday's Reuters story sent PHH's stock to its highest level since that previous deal fell apart.

The company's two businesses are about equal in size. Its mortgage origination and servicing businesses produced $752 million in revenue in the first half of this year, while the fleet management business produced $801 million.

However, the mortgage businesses were much more profitable with operating earnings of $188 million, compared with $42 million for fleet management.

PHH said in a recent Securities and Exchange Commission filing that it is the sixth-largest originator of home mortgage loans in the country. However, like other big mortgage lenders, it is seeing a decline in refinancing volume as interest rates rise, so it is cutting staff.

The company filed a Worker Adjustment and Retraining Notification notice on Oct. 4 saying it would cut 365 jobs in its Jacksonville office, which will leave it with about 700 local employees.

Daniel Lewis, managing partner of investment firm Orange Capital LLC, does not think the lower mortgage volume should affect PHH's stock price.

In a letter to PHH management, which was included in an SEC filing last month, Lewis said "we do not deem declining origination volumes or regulatory uncertainty as an impediment to improved shareholder returns, as evidenced by the share price performance of other MSR (mortgage servicing rights) owners and mortgage originators over the last twelve-month period."

However, Lewis thinks PHH's stock is trading lower than it should, in part because of "the complex financial analysis required to understand the company's unique combination of fleet management and mortgage operations along with the allocation of corporate overhead and interest expense."

Lewis, whose firm controls 5 percent of PHH's stock, urged the company to take several steps, including hiring "a financial advisor to pursue a tax-efficient sale or IPO of fleet management."

According to the Reuters report, the company has already been doing something like that.

After the stock reached a six-year high last Monday, it fell $1.05 to $24.87 Tuesday as Sterne Agee analyst Henry Coffee downgraded his rating on PHH from "buy" to "neutral."

"Over the last few weeks a filing by an activist shareholder, rising interest in what fleet would be worth in a sale or spin (sum of the parts), and an article from Reuters released 15 minutes from the close on Monday have driven the shares of PHH to within a shade of our price target," Coffee said in his research note.

"Given the complexity and cyclicality of the mortgage business, we want to be buyers of this stock up to the point where we have deep fundamental value and then step aside. We think our price target represents just this, and given today's price action, are changing our rating to a neutral," he said.

BAE hiring 100 in Jacksonville

While PHH and other mortgage companies are cutting jobs, at least one company is hiring in Jacksonville.

BAE Systems last week said it is looking to hire about 100 people at its Jacksonville ship-building facility, where it currently employs 475 people.

The British-based company said it is expanding its shipyards in Jacksonville and Mobile, Ala., as it takes on more construction products for the offshore drilling markets.

BAE is currently constructing six platform supply vessels and two dump scows (barges for transporting and disposing garbage) at the two sites. It employs 1,300 people combined in Jacksonville and Mobile and is planning to add a total of 250 workers by mid-2014 at the two sites.

"We continue to grow our backlog of projects and build our commercial shipbuilding workforce," said Richard McCreary, vice president of BAE Systems Southeast Shipyards, in a news release.

BAE acquired the two shipyards when it bought Atlantic Marine Holding Co. in 2010. The two shipyards employed about 1,000 people at the time.

Jacksonville Bancorp approves reverse split

Jacksonville Bancorp Inc.'s board of directors last week approved a reverse 1-for-20 stock split, after the company completed the sale of 10 million shares of new stock.

The reverse split means that shareholders will receive one share of common stock for every 20 they currently own.

The parent company of The Jacksonville Bank is taking this action to raise the trading price of the stock above a required minimum of $1 to keep its Nasdaq listing.

Jacksonville Bancorp has been trading at about 50 cents for six months, with very little daily movement in the price. If the value remains the same, the reverse split will lift the trading price to about $10.

Before announcing the split, Jacksonville Bancorp said it sold 10 million shares at 50 cents each in its recent stock offering. That included about 2.1 million shares sold to existing shareholders through a rights offering and 7.9 million shares sold to institutional and local investors.

"The success of this offering gives us positive momentum as we continue to strengthen our capital position and execute our strategic initiatives," Chairman Donald Glisson said in a news release.

Glisson has been serving as interim principal executive officer since Stephen Green resigned as CEO in June. Jacksonville Bancorp has been searching for a permanent chief executive.

Web.com drops after negative reports

After reaching record highs the previous week, Web.com Group Inc.'s stock dropped sharply Tuesday, apparently in response to two negative columns about the stock on investment website Seeking Alpha.

The two columns by investors who admitted they are shorting Web.com's stock — betting that the stock will fall — question the way the Jacksonville-based company adjusts its financial reports after acquisitions.

The stock fell by $3.01 to $28.81 on Tuesday.

Web.com, which provides website development services for businesses, has had confusing financial reports because of all the adjustments. It can be difficult to dig into the reports and pick out the relevant financial data.

As the stock dropped, J.P. Morgan analyst Sterling Auty said in a research note that the data he examines for Web.com still looks strong, and he reiterated his "overweight" rating on the stock.

"We believe the best indication of the health of the company's business is reflected in the ARPU, subscriber count, and churn metrics," Auty said.

"These have continued to be solid, and improving, allowing the company to generate cash flow that is being used to improve its top-line growth and to de-leverage the balance sheet," he said.

Average revenue per user, or ARPU, has grown from $12.86 a month in the fourth quarter of 2011, when Web.com completed its last major acquisition, Network Solutions, to $14.09, Auty said.

The number of subscribers has grown between 18,000 and 26,000 per quarter over the last four quarters, he said. Churn, or the turnover of subscribers, has been about 1 percent, "which we consider to be a good level, when you compare it to other businesses in the general hosting space," he said.

Two years after that last major acquisition, Auty thinks the accounting impact is "fading" and "going forward, we expect management to be pragmatic in their use of capital to capitalize on acquisitions that it believes will improve shareholder value as we have seen it do over the last three years."

Analyst downgrades Fortegra after third-quarter run

Fortegra Financial Corp. was the second-best performing stock among Jacksonville-based companies in the third quarter, behind Web.com, but that run-up prompted Sandler O'Neill analyst Paul Newsome to downgrade the stock last week.

"We are downgrading shares of Fortegra Financial to 'hold' from 'buy' following its 23.9 percent appreciation during the third quarter of 2013," Newsome said in a research report.

"Our downgrade does not reflect a change in our opinion of the company; however, we believe that shares are currently fairly valued," he said.

Newsome is projecting third-quarter revenue to rise by 34 percent to $103.1 million, but he doesn't think that will necessarily impress Wall Street.

"We believe that investors will want to see how Fortegra Financial balances revenue growth with margin discipline this quarter. This has been an area of investor angst in recent quarters. The company will post extraordinary revenue growth, but this is usually more than offset by a lack of margin discipline," he said.

Stein Mart sales up again

Stein Mart Inc. last week reported that total sales for the five weeks ended Oct. 5 rose 7.3 percent to $112.2 million and comparable-store sales — sales at stores open for more than one year — rose 5 percent.

Avondale Partners analyst Mark Montagna said in a research report Friday that the company's trend of strong comparable-store sales increases is sustainable.

"The comp trend is driven by Stein Mart's increased consumer acceptance of off-price retail, Stein Mart's improved merchandise especially with brand name items and its improved real estate," he said.

With the sales trend increasing his confidence that Stein Mart will grow earnings, Montagna said Avondale put the stock on its "conviction list."

He increased his price target for the stock from $17 to $19. The stock had closed at $13.96 the previous day.

McKesson said to be interested in another deal

After completing its $2.1 billion acquisition of Jacksonville-based PSS World Medical Inc. this year, several financial news outlets reported last week that McKesson Corp. is working on another major deal.

San Francisco-based McKesson, which distributes pharmaceutical and other health-related products, was rumored to be discussing a $5 billion acquisition of German pharmaceutical distributor Celesio AG.

After the report first surfaced in the Wall Street Journal on Tuesday morning, McKesson's stock jumped as much as $8.80 to a record high of $138.43.

mbasch@baileypub.com

(904) 356-2466

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