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Jax Daily Record Monday, Mar. 6, 201712:00 PM EST

Analyst sees more CSX gains from Hunter Harrison

by: Mark Basch Contributing Writer

If you’re still wondering why investors may be willing to approve a big pay package for potential CSX Corp. CEO Hunter Harrison, Deutsche Bank analyst Amit Mehrotra provided some insight last week.

CSX’s stock jumped as much as 33 percent to $49.13 in the days after news leaked that Harrison, former CEO of Canadian Pacific Railway Ltd., has his eyes on succeeding Michael Ward as CSX chief executive.

After meeting with the CEO of hedge fund Mantle Ridge, which is working with Harrison, Mehrotra last week raised his rating on CSX from “hold” to “buy” and said the stock could go even higher if Harrison takes over.

“We have increased our ‘blue sky’ target on CSX to $60 from $48, reflecting our view that the entirety of potential profit improvements may be achieved inside of three years vs. our previous five-year assumption, and with better FCF (free cash flow) than our previous thinking,” Mehrotra wrote in his report.

Harrison has a reputation as a cost-cutter at railroads and Mehortra expects him to target a 58 percent operating ratio at CSX within three years.

The company’s 2016 operating ratio — operating expenses divided by revenue — was 69.4 percent and Ward has been targeting a mid-60s ratio for the Jacksonville-based company.

CSX says Harrison is seeking a total compensation package worth more than $300 million over four years. The total is so high that CSX is planning a special meeting to allow shareholders to vote on it.

However, as Mehrotra previously pointed out, CSX’s market value jumped by more than $8 billion after Harrison’s interest was revealed, so many investors will see the big pay package as justified. (Of course, the 1,000 managers that CSX is laying off to cut costs probably see it differently).

CSX has 926 million outstanding shares, so every $1 gain in the trading price increases its market value by $926 million.

If CSX’s stock reaches Mehrotra’s “blue sky” price of $60, that would be a 63 percent gain from the Harrison effect.

Mehrotra officially set a $56 price target for the stock.

“Our revised $56 target is lower than our blue sky scenario, reflecting some risk of an unsuccessful activist campaign (an area of investor interest currently),” he said.

CSX expects $175M in savings from layoffs

CSX said in a Securities and Exchange Commission filing last week that it expects at least $175 million in annual cost savings from its management layoffs.

The company two weeks ago said it is cutting up to 1,000 management-level jobs, with a majority of those in Jacksonville.

CSX has about 2,500 management employees in Jacksonville. The company plans to complete the layoffs by mid-March.

The company expects at least $160 million in charges to its first-quarter earnings from employee termination benefits, including $90 million in severance payments.

Wells Fargo meeting in Ponte Vedra

Wells Fargo & Co. last week filed its proxy statement indicating it will hold its annual shareholders meeting at the Sawgrass Marriott in Ponte Vedra Beach on April 25.

It should be an interesting meeting in the wake of last year’s scandal, where we learned employees were opening accounts for customers without permission to boost their sales numbers.

The San Francisco-based bank says an independent investigation is ongoing and the results will be revealed at the annual meeting.

It is a common practice for large corporations to move their annual meetings to different cities. In the last three years, IBM and General Electric Co. held their shareholders meetings at the Prime Osborn Convention Center.

CSX is another company that typically moves its meeting. The company has not said where it will hold the special meeting to vote on Harrison’s proposed compensation package.

Advanced Disposal capitalizes on IPO

After completing its initial public offering in the fourth quarter, Advanced Disposal Services Inc. is looking to capitalize in 2017 (pun intended).

“Our focus as a company is to generate ever-improving free cash flow over the long run. And the capital structure changes we put in place in 2016 set us up nicely to achieve strong free cash flow growth in 2017,” CEO Richard Burke said in the Ponte Vedra-based company’s quarterly conference call.

Besides improving the balance sheet, Burke also outlined improvements to Advanced Disposal’s operations, including increased use of compressed natural gas vehicles.

“We’ve made prudent investments in our assets to enhance productivity and reduce our carbon footprint, including increasing the percentage of our routed vehicles utilizing CNG from 11 percent in 2014 to 16 percent in 2015 and now 19 percent in 2016,” he said.

Advanced Disposal is forecasting modest revenue growth from $1.405 billion in 2016 to between $1.45 billion and $1.475 billion this year. However, the company will look to continue growing through acquisitions.

“As we look towards 2017, we plan to continue to execute on the strategy we’ve laid out to our stakeholders. It starts with market selection where we will continue to focus on vertically integrated operations and secondary markets, primary markets where we have a strong asset base and disposal neutral markets,” Burke said.

Disposal neutral markets are areas where landfills and transfer stations are controlled by government agencies and all competitors have equal access.

“While the timing of acquisitions vary year to year, we will continue to focus on closing additional opportunities throughout 2017 that strengthen our competitive position in target markets,” Burke said.

Extra week helps Publix

Publix Super Markets Inc. last week reported fourth-quarter earnings of 71 cents a share, 3 cents higher than the fourth quarter of 2015.

The Lakeland-based supermarket chain said earnings were helped by an extra week in the fourth quarter of 2016.

Total sales rose 11.1 percent to $9.1 billion, helped greatly by the extra week. Comparable-store sales (sales at stores open for more than one year) rose 2.2 percent.

Publix said based on the latest appraisal, its stock price increased to $40.90 as of March 1, up from $40.15 on Nov. 1.

Publix’s stock is not publicly traded and is made available for sale only to employees, with the price determined by appraisals five times a year.

The company has about 190,000 employees and its total number of stockholders is about 179,000.

IberiaBank expands footprint in Florida

IberiaBank Corp. is expanding its Florida footprint by acquiring a Miami-based bank.

The company last week announced a $1.03 billion agreement to buy Sabadell United Bank that will make Florida the biggest market for Louisiana-based IberiaBank.

When completed, the addition of Sabadell’s $4.4 billion in deposits will give IberiaBank $8.4 billion in Florida deposits. The company’s total deposits will be $21.8 billion, with bank branches in seven Southeastern states.

IberiaBank has two branches in Jacksonville and one in Ponte Vedra Beach, which it acquired in 2015 when it bought Tampa-based Florida Bank.

IberiaBank had actually been in Jacksonville before, after its 2009 acquisition of Alabama-based CapitalSouth Bank, which had three area branches. However, IberiaBank closed those branches in 2012.

J&J completes vision care deal

Johnson & Johnson last week completed its $4.3 billion acquisition of Abbott Medical Optics, a deal that will significantly expand its Jacksonville-based vision care business.

Johnson & Johnson Vision has been focused on its Acuvue contact lens business, but the addition of Abbott expands the business with ophthalmic products for cataract surgery, laser refractive surgery and consumer eye health.

TV operators increase earnings

Political ads and the Olympics helped the two public companies operating television stations in Jacksonville increase revenue and earnings in 2016.

Tegna Inc.’s media revenue rose 14.9 percent to $1.9 billion, with operating income rising 12.9 percent to $806.4 million. It operates 46 stations, including WTLV TV-12 and WJXX TV-25 in Jacksonville.

Meanwhile, Graham Holdings Co.’s television division increased revenue by 14 percent to $409.7 million and raised operating income by 22 percent to $200.5 million.

The company operated five stations in 2016, including WJXT TV-4 in Jacksonville. However, in January it completed the acquisition of WCWJ TV-17 in Jacksonville and another station in Roanoke, Va.

Both Tegna and Graham said 2016 results were helped by additional revenue from political advertising, compared with 2015, and by Summer Olympics-related ad revenue at their NBC affiliates.

The companies also reported increased retransmission revenue, which represents the fees paid by cable and satellite companies for the right to carry stations on their systems.

Equity One earnings rise before merger

A day before Jacksonville-based Regency Centers Corp. completed its acquisition of Equity One Inc., New York-based Equity One reported higher 2016 earnings.

Equity One said Tuesday its core funds from operations rose 7 percent last year to $1.41 a share.

Funds from operations are basically earnings excluding noncash charges, such as depreciation and amortization expense, and are a key indicator of a real estate investment trust’s performance.

Regency last month said its core FFO rose 8 percent in 2016 to $3.29 a share.

With the merger, Regency now operates 429 properties across the country, mainly grocery-anchored shopping centers.

Regency said the merger will be accretive to its FFO.

Simon malls highly occupied

Regional mall operator Simon Property Group Inc. reported strong occupancy at its Jacksonville area properties at the end of 2016.

The 1.4 million-square-foot St. Johns Town Center was 99.5 percent occupied, the 1.1 million-square-foot Avenues mall was at 96.5 percent and the 327,592-square-foot St. Augustine Premium Outlets were at 98.8 percent.

Simon owns the outlet mall outright, but owns 50 percent of St. Johns Town Center and 25 percent of The Avenues as part of joint ventures.

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