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Basch Report
Jax Daily Record Thursday, Oct. 10, 201905:20 AM EST

Economy weighing on outlook for CSX Corp.; more virtual annual meetings

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Despite “monumental productivity gains” at the Jacksonville-based railroad, analysts are downgrading company.
by: Mark Basch Contributing Writer

CSX Corp. continues earning high marks for operating efficiency gains since its management overhaul in 2017.

However, when the Jacksonville-based railroad company reports its third-quarter earnings next week, most analysts think its expense efficiency won’t be enough to offset slowing revenue trends in the industry.

“We expect the U.S. rails will benefit from improving truckload rates in 2020 but face more immediate volume headwinds that were forming well before this week’s PMI-induced negativity,” J.P. Morgan analyst Brian Ossenbeck said Friday in an outlook report on the industry.

PMI refers to a key U.S. manufacturing indicator, the purchasing managers’ index compiled by the Institute for Supply Management. That index fell to 47.8% in September, its lowest level since June 2009 when the U.S. was in the final month of the last recession.

 “Against this backdrop, the U.S. rails will need to accelerate PSR productivity gains,” said Ossenbeck, referring to precision scheduled railroading. 

That’s the efficiency initiative championed by late Chief Executive Hunter Harrison when he joined CSX in March 2017 and continued by his successor, Jim Foote.

CSX has improved its operating efficiency with PSR and other railroads now are implementing it as well to catch up, but analysts don’t think CSX can improve its efficiency much more than it already has.

So, despite “monumental productivity gains” last year, Ossenbeck downgraded his rating on CSX from “overweight” to “neutral” because of possible slowdowns in freight volume.

“CSX is progressing quickly with its precision scheduled railroading implementation, improving network efficiency by reducing headcount and increasing asset utilization,” he said.

“In the near term, we expect increasing export coal headwinds and fading demurrage revenue will put downward pressure on earnings while operating efficiency gains become more incremental compared to recent years.”

Demurrage revenue consists of payments from freight shippers for using rail cars beyond a specified time.

Coal shipments historically had been CSX’s biggest business but shifting use of energy resources has lowered U.S. demand in recent years. While CSX had been able to make up some of the low domestic demand with export shipments, export coal volume has been falling this year.

Coal shipments accounted for more than 30% of CSX revenue a decade ago but in the first half of this year, coal only produced 18% of revenue.

Declining coal demand is not the only issue for the railroad industry in the near term. A Bloomberg News story last weekend described a “railroad recession” in the works with shipments also declining for autos, grain, chemicals and consumer goods.

“The U.S. rail networks will need to post robust productivity measures in order to tread water amidst sliding volumes,” Ossenbeck said in his report.

“Fortunately the path to PSR has become more evident at each of the railroads which likely utilized weaker volume to jump-start resource reduction efforts.”

The Bloomberg story said three of the four major U.S. railroads are projected to report higher third-quarter earnings, but CSX is the one expected to show a decline.

CSX is ahead of the pack with its implementation of PSR but in the Wall Street view of the world, that means it has no more room for improvement and its stock could suffer.

More virtual annual meetings

Following a trend started by CSX in the spring, another Northeast Florida-based company is planning to hold a “virtual” annual shareholders meeting.

Ponte Vedra-based Advanced Disposal Services Inc. filed a proxy statement last week for its annual shareholders meeting Nov. 20 but is not inviting stockholders to visit in person. Shareholders can listen to the proceedings via a webcast only.

Public companies say they can save money with a virtual meeting by not renting a big conference space. They also contend the virtual meeting gives more shareholders access because they don’t have to travel to the meeting site and can submit questions online.

However, shareholder advocates argue that the traditional meeting before an audience of stockholders gives a better opportunity to question executives and directors of large companies.

CSX’s virtual meeting in May lasted about 20 minutes, much shorter than its previous stockholder meetings which lasted an hour or more.

Jacksonville-based ParkerVision also is giving shareholders an option to “attend” its annual meeting online Nov. 15. But its proxy said shareholders also can attend in person.

Advanced Disposal had scheduled a virtual annual meeting for May, but the meeting was postponed after the company agreed in mid-April to a buyout by Waste Management Inc.

Advanced Disposal instead had a special shareholders meeting in June, with shareholders invited to attend in person. The company said about 86% of shares were voted to approve the buyout at that meeting.

The merger is not expected to be completed until the first quarter of 2020, because of antitrust scrutiny of the deal between the two waste management companies.

Waste Management is the largest U.S. solid waste disposal company with about 28% of the market, while Advanced Disposal ranks fourth with about 3%. Analysts expect Waste Management to divest some operations where the two companies overlap to receive regulatory approval for the deal.

It is unusual for a company to hold a regular shareholders meeting with a buyout approved and pending. But Advanced Disposal said in the proxy it scheduled the meeting to comply with New York Stock Exchange regulations requiring listed companies to hold a regular stockholders meeting every year.

Another hedge fund targets Tegna

A New York-based hedge fund said in a Securities and Exchange Commission filing last week it has been accumulating shares of Tegna Inc. after reports of “possible M&A activity” for the television station operator.

Tegna operates 62 stations in 51 U.S. markets, including Jacksonville NBC affiliate WTLV TV-12 and ABC affiliate WJXX TV-25. 

Standard General L.P. said in its SEC filing it now has 21.1 million shares of the Virginia-based company, or 9.8% of the stock.

Standard General said it has experience investing in and “overseeing” merger and acquisition activity involving television broadcasters and it “now intends to become actively engaged” with Tegna.

It did not say it is interested in buying the company but hinted it may push management into seeking a deal with another party.

The filing follows reports in August that fund manager Apollo Global Management was interested in buying Tegna but was rebuffed.

Apollo has another deal in place to buy control of 14 stations run by Cox Enterprises Inc., including Jacksonville CBS affiliate WJAX TV-47 and Fox affiliate WFOX TV-30.

If it is able to buy Tegna, it would almost certainly be required to divest some of the Jacksonville stations.

Glowpoint completes merger

After its proposed merger with Jacksonville-based SharedLabs Inc. fell apart, Glowpoint Inc. was able to agree to and complete another merger quickly.

Denver-based Glowpoint said it completed its merger Oct. 1 with Los Angeles-based Oblong Industries Inc., two weeks after the companies announced their agreement.

SharedLabs, which had been seeking an initial public offering, instead agreed last November to merge with publicly traded Glowpoint. But that deal fell apart in April.

Glowpoint said in recent SEC filings it is working with SharedLabs to recover unspecified fees and expenses related to the failed merger.

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