CSX Corp. officials were pleased with the company's third-quarter performance and expressed optimism about the rest of this year but over the long haul, several analysts think the Jacksonville-based railroad company will have a difficult time meeting its earnings growth goals.
Two analysts downgraded their ratings on CSX Thursday, saying the overhang of lower coal demand will continue to put pressure on the company's earnings.
Coal has been king at CSX and shipments of coal still accounted for 24 percent of the company's business in the third quarter, but that's down from 32 percent two years ago.
That represents a drop from $957 million in coal revenue in the third quarter of 2011 to $720 million in this year's third quarter.
CSX has been touting increased business from other areas, such as its intermodal service, but analysts don't think it will be enough.
BMO Capital Markets analyst Fadi Chamoun downgraded his rating on CSX from "outperform" to "market perform" and RBC Capital Markets analyst Walter Spracklin essentially issued the same downgrade, from "outperform" to "sector perform."
"We are lowering our rating on CSX shares to sector perform as the key takeaways from yesterday's conference call suggest that continued pressure on coal and negative pricing trends put at risk CSX's guidance for 10 to 15 percent annual net EPS growth from 2013 to 2015," Spracklin said in his report Thursday.
"While the challenges in coal markets are not new news, this segment did not rebound in 2013 and we have to recognize the risk that these headwinds could persist indefinitely. Management noted coal needs to rebound for CSX to achieve its EPS guidance, and at this point, we lack the conviction to say that it will," he said.
Spracklin did say "we share management's positive outlook on CSX's intermodal opportunity."
However, he also said the company's improved outlook for the rest of this year "is largely based on non-operating and lumpy items." That includes real estate gains and gains from liquidated damages, which are money paid by customers to CSX for not meeting minimum contract obligations.
Other analysts did not downgrade CSX but reiterated an already-cautious outlook.
Anthony Gallo of Wells Fargo maintained his "market perform" rating on the stock.
"We were pleased to see organic growth in intermodal and crude oil and cyclical firming in other markets offset persistent coal weakness. Nonetheless, we think acceleration in earnings is unlikely near-term barring an unexpected recovery in coal and given current trends elsewhere," he said in his report.
Justin Yagerman of Deutsche Bank maintained a "hold" rating, which is the equivalent of market perform.
"We remain impressed with CSX's operating performance and productivity gains despite mix headwinds," Yagerman said in his report.
"However, we continue to see a balanced risk/reward equation for CSX, given mix and coal headwinds," he said.
One analyst who continues to rate CSX as a "buy" is John Larkin of Stifel, Nicolaus & Co., who has a $29 price target for the stock.
"This 12-month target, combined with the company's 2.3 percent dividend yield, provides just over 14 percent upside potential over the coming year, barely a sufficient amount to warrant a reiteration of our buy rating," Larkin said in his report.
However, he added, "we would consider revisiting our buy rating should the company's shares trade up to $28.50 or higher."
CSX's stock fell by 52 cents to $25.37 Thursday after the analyst downgrades.
According to Thomson Financial, 17 analysts currently rate CSX at the equivalent of "hold" and 10 rate it as a "buy."
Brighter outlook for Johnson & Johnson
Johnson & Johnson last week reported adjusted third-quarter earnings of $1.36 a share, 11 cents higher than last year and 4 cents higher than the average forecast of analysts surveyed by Thomson Financial.
The New Jersey-based health products giant also slightly upgraded its earnings forecast for the full year to a range of $5.44 to $5.49 per share, compared with its previous forecast of $5.40 to $5.47.
Johnson & Johnson's Jacksonville-based vision care subsidiary, Vistakon, reported total sales fell by 2.1 percent in the quarter to $748 million, but that was entirely due to the impact of a stronger U.S. dollar on international sales.
Excluding the currency impact, Vistakon's sales showed a 3.9 percent increase in the quarter on an operational basis, Johnson & Johnson said. Its U.S. sales rose by 1.9 percent to $265 million.
Even before the earnings report last week, one analyst saw a brighter future for Johnson & Johnson. Goldman Sachs analyst Jami Rubin took the company off the firm's "sell" list and upgraded her rating to "neutral."
Rubin said in a report that her upgrade was prompted by a strong outlook for Johnson & Johnson's pharmaceutical business. Meanwhile, she thinks other parts of the company's business continue to weigh down the stock.
"We believe JNJ's (pharmaceutical) pipeline is among the most exciting in the sector, but remains inside JNJ's large structure," Rubin said.
"While pharma looks strong, MD&D (medical device and diagnostic division) and consumer remain headwinds, and their weak performance has limited upside to EPS," she said.
The division includes Vistakon. Rubin has an optimistic outlook for the contact lens business, which she called a "reliable grower in the low-single digits off a $3 billion base, according to our estimates."
However, she forecasts declines in other segments of the MD&D division, including the diabetes and surgical care segments.
Rubin last year suggested a breakup of Johnson & Johnson into three separate companies.
Pantry outlines market position in Jacksonville
We've always known that Jacksonville is a significant market for The Pantry Inc., operator of the Kangaroo convenience store chain.
However, we never really knew exactly how significant it is until it provided details in an investor presentation last week. At least I've never seen these details before.
The presentation before a Wells Fargo Securities forum in Atlanta was included in a Securities and Exchange Commission filing last week. It shows that The Pantry has 269 stores in the Jacksonville market area, which includes counties outside of the five-county metropolitan statistical area.
That's the company's second-biggest market outside of Charlotte, N.C., which has 474 stores.
The Pantry is headquartered in Cary, N.C., which is a suburb of Raleigh.
The investor presentation also said that the company's Kangaroo stores are the largest chain in the Jacksonville market, with Flash Foods second and RaceTrac third. It doesn't give data for those other two chains.
The Pantry became a major player in the market when it acquired Lil' Champ, a homegrown Jacksonville convenience store chain, in 1997. The company eventually converted all of its area stores into Kangaroo.
The company operates 1,547 stores in 13 states. It reported revenue of $5.8 billion in the nine-month period ended June 27.
Stakool changing name
You'll no longer be hearing about Stakool Inc. The company said in an SEC filing last week that it is changing its name to Fresh Promise Foods Inc.
Stakool was a Jacksonville-based company marketing a line of natural and organic food products under the name Anthus Life Corp. This year, it replaced its management and moved its offices to Alpharetta, Ga.
In last week's SEC filing, the company said "we believe that changing the name of the company to Fresh Promise Foods, Inc. will more accurately reflect and represent to the public the business of the company."
However, it does not give details about what that business is. In its last financial report, Stakool reported no revenue in the second quarter this year.
The filing also said the company is requesting a new ticker symbol from its current symbol of "STKO."
The stock was trading at about 3 cents a share last week.
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