Analysts throw some caution into CSX outlook


  • By Mark Basch
  • | 12:00 p.m. January 19, 2015
  • | 5 Free Articles Remaining!
Michael Ward
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CSX Corp. CEO Michael Ward last week said he was “feeling pretty damn good” about the state of the Jacksonville-based railroad company. However, some analysts are throwing caution into the outlook for CSX.

Ward told the Daily Record that a strong demand for CSX’s freight services should help earnings this year, and company officials were telling analysts the same thing.

“Management sees the potential for ‘much stronger pricing in fiscal year 2015’ compared with fiscal year 2014. Indeed, continued strength in the economy and lower fuel prices will give CSX the ability to push price further, as customers benefit from paying lower fuel surcharges,” Credit-Suisse analyst Allison Landry said in a research note.

However, Stifel, Nicolaus & Co. analyst John Larkin is less optimistic about CSX’s ability to raise prices charged to its freight customers this year.

“It is difficult to understand how pricing momentum could be accelerating, as management suggested on its conference call, given the persistently weak service levels,” Larkin said in his report.

Service issues have been plaguing CSX and other railroads in recent months. Larkin said CSX’s service metrics were stable between the third and fourth quarters, but on-time arrivals dropped from 76 percent in the fourth quarter of 2013 to 43 percent in the fourth quarter of 2014.

CSX expects to improve its service levels this year. “The primary lever to be utilized near term will be the addition of new and recently repaired/overhauled locomotive power into the system,” Larkin said.

“Presumably, train delay will be cut dramatically once enough horsepower is available, which in turn should improve the company’s network fluidity, which should ultimately give the company the opportunity to sell or park the least efficient locomotives in its fleet and to furlough the resulting extra crews which will be created as the company’s assets turn faster,” he said. “In addition, customers may acquiesce to paying higher rates in exchange for the eventual service improvements.”

Besides dealing with service issues, UBS Securities analyst Thomas Wadewitz is a little more pessimistic about some of CSX’s business forecasts.

“CSX indicated that its base case for 2015 reflects flat domestic coal tons and it does not anticipate a change in its crude by rail and frac sand volumes as a result of the sharp decline in oil prices,” Wadewitz said in his report.

“We recognize that weather and natural gas prices are significant factors affecting the trend in utility coal volume and visibility to these factors is limited,” he said.

“Nevertheless, our model reflects a more cautious view on domestic coal tons (-3 percent in total domestic coal and -8 percent in domestic utility) and we believe that there is likely to be a negative impact from the sharp decline in oil prices in terms of potential weakness in crude by rail and frac sand in the second half of 2015 or potentially 2016.”

Wadewitz had downgraded his rating on CSX from “buy” to “neutral” the previous week, before the fourth-quarter earnings report. Larkin has a “hold” rating on the stock, but Landry maintains an “outperform” rating.

Robert W. Baird analyst Benjamin Hartford also maintained an “outperform” rating after last week’s earnings report.

“Fourth-quarter EPS was roughly in-line with expectations and management reaffirmed their 2015 outlook of ‘double-digit’ EPS growth, which should quell investor concerns regarding negative headwinds from energy price declines (both crude oil and natural gas) in recent months,” Hartford said in his research note.

“First half 2015 headwinds will linger as crude and coal headwinds are digested and 2015 estimates reset, but we remain focused on incremental rail service improvement during 2015,” he said.

Goldman Sachs rates EverBank a ‘sell’

In the old days, like a decade ago, Wall Street analysts rarely used the “sell” rating on stocks. When you saw a sell rating, it would set off alarm bells that a company had to be in dire straits.

That has changed and the sell rating has become more common, just an indication that analysts expect a stock to decline in price, but not necessarily a whole lot.

So it may have been disappointing to shareholders, but not alarming, that Goldman Sachs analysts last week saddled Jacksonville-based EverBank Financial Corp. with the “sell” rating.

“We downgrade EverBank to ‘sell’ from ‘neutral’ as we see EverBank as the most likely name to disappoint in 2015 with consensus,” the analysts said in a report on regional bank stocks.

“Fundamentals are not as strong as estimates indicate: We believe 2015 consensus EPS of $1.44 will prove challenging to reach,” they said. The Goldman Sachs analysts project EverBank’s earnings at $1.30 a share this year.

Their earnings forecast is not a huge drop-off from the consensus forecast of all analysts, and Goldman Sachs is really not looking for a big drop in the stock price. The analysts’ target price for EverBank is $17.50, down from its market price of $19.06 at the beginning of 2015.

Aside from EverBank, the Goldman Sachs analysts expect good things from regional bank stocks this year.

“While regional banks underperformed in 2014 (+3.9 percent vs. +11.4 percent for S&P), we expect fortunes to reverse in 2015 as fundamentals should improve and valuations move higher,” they said.

They maintain “buy” ratings on several big regional banks that operate in the Jacksonville market.

“Our top pick remains SunTrust, where we see 24 percent upside to our $48 12-month price target,” the analysts said.

Other top picks include Regions Financial Corp. and Fifth Third Bancorp.

By the way, beyond Goldman Sachs’ rating, four analysts currently rate EverBank at “hold,” three rate it at “buy” and three others rate it as a “strong

buy,” according to Thomson Financial.

Analyst downgrades Landstar to ‘hold’

KeyBanc Capital Markets analyst Todd Fowler last week downgraded Jacksonville-based Landstar System Inc., but only from “buy” to “hold.”

Fowler said in a research note that “flatbed checks and datapoints present a more mixed outlook, combined with current valuation” for the trucking company.

“Near-term fundamentals are seemingly intact; however, potential slowing in oil, gas and metals end markets leaves us incrementally cautious on flatbed capacity and demand. Strength in dry-van, variable incentive compensation and free cash

limit downside, in our view,” he said.

Regency Corps earnings in line

Regency Centers Corp. will be announcing its final results for the year in mid-February, but the Jacksonville-based shopping center developer released some preliminary data for the fourth quarter last week.

Regency said its core funds from operations will be between 70 cents and 72 cents a share, which would be in line with the forecast it gave in December.

Funds from operations are basically earnings excluding depreciation and amortization expenses and are considered the key metric for evaluating real estate companies.

Regency said its portfolio of 322 retail properties, with 43.1 million square feet of space, was 95.4 percent leased at the end of 2014.

Regency also announced it is increasing its quarterly cash dividend from 47 cents a share to 48.5 cents.

General Employment back in NYSE MKT compliance

General Employment Enterprises Inc. last week said it has received a letter from the NYSE MKT LLC saying it has resolved the “listing deficiency” for its stock.

The NYSE MKT is a marketplace for stocks with smaller

capitalizations. It evolved from the former American Stock Exchange.

General Employment had said in its annual report last month that it was in danger of losing its listing on the NYSE MKT because the staffing company was below the exchange’s minimum capital requirements. The company also said the NYSE MKT wanted General Employment to improve its financial condition.

General Employment last month took a step toward growing and improving its operations by agreeing to acquire Jacksonville-based Scribe Solutions Inc. As part of that merger, Scribe Solutions CEO Derek Dewan will become CEO of Naperville, Ill.-based General Employment.

General Employment also last week announced that well-known economist Arthur Laffer has been added to its board of directors. Laffer has a connection to Dewan, as he was a board member of Jacksonville-based MPS Group Inc. when Dewan was chairman of that company.

Laffer was on the MPS board when it agreed to a buyout by Adecco Group in 2009.

Laffer became famous as an adviser to President Ronald Reagan in the 1980s for his advocacy of supply-side economics.

Johnson & Johnson also gets a ‘sell’

Also last week, Goldman Sachs’ pharmaceutical industry analysts downgraded Johnson & Johnson to “sell,” while maintaining a positive outlook for the entire industry.

“We take our rating on JNJ to ‘sell’ from ‘neutral’ (no change to our price target) as we see significant organic headwinds to pharma revenues, the key driver of the company,” they said in their industry report.

The analysts did say they are expecting better results from Johnson & Johnson’s medical devices and diagnostics division, which includes its Jacksonville-based contact lens subsidiary, Vistakon.

Johnson & Johnson will report its yearend results this week.

Beyond Johnson & Johnson, the Goldman Sachs analysts have an “attractive” view of the entire pharmaceutical industry “on the back of strong new product launches and potential for further deals (M&A/break-ups/spins).”

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