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- 2014 - January - 20th -

One analyst sees upside for CSX

By Mark Basch, Contributing Writer

Everything pointed to a drop for CSX Corp.'s stock on Thursday morning.

The stock had reached a record high of $29.25 on Wednesday and that alone would have prompted many investors to sell their shares, given the market's predilection to lock in profits when it can.

If that wasn't a good enough reason to sell, after the market closed Wednesday, CSX reported fourth-quarter earnings that were a penny lower than analysts' forecasts.

Sure enough, the Jacksonville-based railroad company dropped as low as $26.76 on Thursday morning.

However, even before the drop, one analyst decided it was time to buy.

Argus Research analyst John Gelcius values the stock at $35, so he raised his rating on CSX from "hold" to "buy" on Thursday morning.

"We have become more positive about North American railroad companies based on strengthening consumer demand for finished goods, accelerating shipments of crude oil from shale formations, near-record grain harvests, and signs of stabilizing coal shipments," Gelcius said in his report.

Coal shipments, CSX's biggest business segment, have been a source of angst for investors over the last couple of years as shrinking demand for coal has hurt the company's business. However, Gelcius has a somewhat better outlook for CSX's coal business.

"We note that coal inventories have begun to shrink at some utilities and that the overall decline in volume was partly offset by increased shipments of export coal," he said.

"While the coal segment remains near its recent trough, year-over-year comparisons should become easier going forward. We expect CSX to alleviate pressure in the coal segment by raising domestic transport pricing and by shipping more coal per train," he said.

Gelcius' $35 price target represents the high for analysts following CSX, according to Thomson Financial.

John Larkin of Stifel Nicolaus has a $30 price target, so he lowered his rating from "buy" to "hold" after the stock rose above $29.

"Our 12-month fair value estimate provides less than 3 percent upside potential over the coming 12 months, which is insufficient to warrant the perpetuation of our buy rating. Even when one adds the company's 2.1 percent dividend yield to the common shares' upside potential, a total return of only 4.7 percent is available," Larkin said in his report.

"It is our hope that, sometime during the remainder of 2014, we will see a more attractive entry point for those wishing to establish positions or add to current positions in the company's common shares," he said.

Larkin said he might reconsider his rating if the stock drops below $25.50.

Wells Fargo analyst Anthony Gallo isn't changing his rating right now, but Thursday's stock drop did give him food for thought.

"Given lackluster near-term growth we remain market perform but think the risk/reward has become more interesting given the stock reaction," Gallo said in his report.

According to Thomson, 17 analysts currently rate CSX at the equivalent of a "hold" and 11 rate it as a "buy."

Analyst upgrades Regency

J.P. Morgan analyst Michael Mueller last week upgraded Jacksonville-based Regency Centers Corp. from "neutral" to "overweight," as the firm revised its outlook on a number of real estate investment trust stocks.

"We believe the stock now has better relative valuation and better marginal growth prospects, as it wrapped up the heavy lifting associated with its capital recycling program," Mueller said in his note on Regency.

"The company is transitioning from being a net-seller to a net-capital deployer through developments and selective acquisitions. This should result in a higher earnings growth rate than what the company has been posting," he said.

EverBank downgraded after new high

After its stock reached a new high of $18.97 the previous week, Sterne Agee & Leach analyst Peyton Green downgraded Jacksonville-based EverBank Financial Corp. last week from "buy" to "neutral."

Green downgraded the stock because it had surpassed his $18 price target.

"Although our long-term outlook remains favorable, we believe that a difficult mortgage origination environment could weigh on the valuation over the near term," he said in a research note.

Green also lowered his 2014 earnings forecast by 10 cents a share to $1.20.

"Over the long term, we believe that management will be successful in reducing EverBank's exposure to mortgage by increasing its banking lines of business, which should result in less EPS volatility and a higher valuation," he said.

"However, we believe that origination volumes and gain on sale revenue will be lower than we previously modeled, which will pressure results over the near term relative to Street expectations, based on our modeling."

McKesson takeover bid fails

Four days after announcing an agreement that seemed to ensure it could take over German pharmaceutical distributor Celesio AG, McKesson Corp. last Monday announced that its bid to buy Celesio had failed.

McKesson, the San Francisco-based health care services giant, said not enough holders of Celesio stock and convertible bonds approved the deal. McKesson needed 75 percent to tender their shares and bonds, but it only received 72.33 percent.

The Celesio deal would have been McKesson's first major acquisition since it acquired Jacksonville-based PSS World Medical Inc. last year. It would have created a company with annual revenue of more than $150 billion, with about 81,500 employees in more than 20 countries.

McKesson CEO John Hammergren happened to be speaking last Monday at a health care conference sponsored by J.P. Morgan Chase, and he said he was surprised by the rejection of the deal.

"This is fresh news to us," he said, according to a report by Bloomberg News.

"The best I can speculate is that people either forgot the tender date or they somehow believed that there is more on the other side of this," he said.

McKesson had said that its offer the previous week was its "best and final offer."

McKesson had originally offered to pay about $8.3 billion in October to buy Celesio but U.S. hedge fund Elliott Management Corp., which controls 25 percent of Celesio, said the offer was too low.

McKesson satisfied Elliott by raising its offering price from 23 euros per share to 23.5 euros on Jan. 16 and it seemed that would be enough to ensure shareholder approval for the deal.

At the conference, Hammergren said the company is exploring a possible joint venture with Celesio instead of an outright merger, according to Bloomberg.

"We have been talking to Celesio for some time about various alternatives," he said.

McKesson's stock, which reached a record high of $177 on Jan. 16 after it announced the higher offer, dropped $8.30 to $167.14 last Monday after Celesio shareholders rejected the deal.

Foley takes pay cut after LPS deal

Following Fidelity National Financial Inc.'s acquisition of Lender Processing Services Inc., Bill Foley is taking a cut in pay.

According to a Securities and Exchange Commission filing last week, Foley was paid a base salary of $850,000 in his role as chairman of FNF. After the acquisition of LPS, his contract was revised so that his salary will be divided between FNF and the new corporation formed to hold LPS, Black Knight Financial Services, but the total of the two salaries will be lower. Foley is serving as chairman of both entities.

Foley will be paid base salaries of $425,000 by FNF and $212,500 by Black Knight, the filing said. It also said his "total combined annual incentive bonus opportunity will not increase."

Black Knight was formed because, as part of the deal to acquire LPS, investment firm Thomas H. Lee Partners acquired a 35 percent stake in the business.

Foley is also vice chairman of the board of Fidelity National Information Services Inc. and receives director fees, but no salary from that company.

mbasch@baileypub.com

(904) 356-2466

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